The Bank of Canada, as expected, rose today the key rate to 1.50%. According to analysts from Wells Fargo, the pace of hikes is likely to slow ahead as trade risks loom.
“For a fourth time in the past year, the BoC hiked rates 25 bps, bringing the overnight lending rate to 1.50 percent. Markets widely expected the move, given firming inflation and other signs of an economy close to capacity.”
“Core measures of inflation are near the middle of the BoC’s target range and headed higher. A weaker Canadian dollar, which has fallen in the wake of trade concerns, and new tariffs on U.S. imports will add upward pressure to inflation, along with growing capacity constraints.”
“Solid wage growth reflects a tightening labor market. Average hourly earnings growth reached 3.9 percent year over year in May, the highest rate since 2009, and has come in above 3.0 percent every month so far in 2018.”
“Output growth is also picking up. Canadian GDP grew only 1.3 percent annualized in Q1, a downshift from growth of 4.0 percent in Q1-2017. However, we expect Q1 to be the weakest quarter of the year, due to higher oil prices, stronger export growth and a stabilization in residential investment.”
“Growth faster than the long-term sustainable rate should further reduce spare capacity in the economy.
“Trade uncertainty is the most immediate risk to an otherwise solid outlook for the Canadian economy.
“Canada sent 76 percent of its goods exports to the United States in 2017, and exports make up almost a third of Canadian GDP. Therefore, escalating trade tensions with its southern neighbor could have a significant effect on growth.”
“We expect the BoC to hike once more in 2018, with risks tilted to the downside.”
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