The Bank of Canada monetary policy statement from July meeting

Galtero Lara
Julio 11, 2018

Poloz recently said the impacts of the U.S.

The rate increase, by a quarter of a percentage point, took the bank's overnight interest rate to 1.50 percent, still well below the "neutral" rate of 2.5-3.5 percent the bank sees as a sweet spot for monetary policy, where it neither boosts nor restrains growth.

However, the central bank said it would take a gradual approach to future rate increases amid mounting tensions over trade with the US, among other uncertainties.

The Bank of Canada's latest interest rate hike means higher borrowing costs for consumers with variable-rate mortgages, loans or lines of credit, but it is also good news for savers and future homeowners.

The decision will likely prompt Canada's big banks to raise their prime rates, thereby passing on the rate increase along to their customers. The tariff fight, the bank estimated, will shave almost 0.7% from Canada's economic growth by the end of 2020.

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However, the negative blow of the trade policies recently put in place are to be largely offset by the positives for Canada from higher oil prices, which are above US$73 per barrel, and the stronger USA economy, the bank said.

The bank said US steel and aluminum tariffs imposed in June and retaliatory countermeasures by Canada in July would trim exports, imports and economic growth, and boost inflation, but strong global demand and higher commodity prices were offsetting the tariff headwind.

"This should be consistent with a more firm pricing for another hike this year", said Alvise Marino, FX strategist at Credit Suisse in NY.

The bank, however, noted in its report that despite "healthy" labour market conditions, employment growth and average hours worked have slowed down compared to last year's surge. CPI inflation is expected to edge up further to about 2.5 per cent before settling back to 2 per cent by the second half of 2019.

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