On September 5, 2018, The Bank of Canada announced it would hold its key policy rate at 1.5% as trade discussions with the U.S. continue to dominate economic news, creating concerns about the future outlook.
Per the bank’s statement below, it expects to continue on its tightening course as economic data is strengthening. We think pausing any further rate increases at this juncture to determine the outcome of trade discussions is a prudent decision by the bank. We do expect one more increase prior to year-end, assuming NAFTA talks conclude positively.
From Bank of Canada's statement on September 5, 2018:
"The Canadian economy is evolving closely in line with the Bank’s July projection for growth to average near potential. Following growth of 1.4 per cent in the first quarter, GDP rebounded by 2.9 per cent in the second quarter, as the Bank had forecast. GDP growth is expected to slow temporarily in the third quarter, mainly because of further fluctuations in energy production and exports.
While uncertainty about trade policies continues to weigh on businesses, the rotation of demand towards business investment and exports is proceeding. Despite choppiness in the data, both business investment and exports have been growing solidly for several quarters. Meanwhile, activity in the housing market is beginning to stabilize as households adjust to higher interest rates and changes in housing policies. Continuing gains in employment and labour income are helping to support consumption. As past interest rate increases work their way through the economy, credit growth has moderated and the household debt-to-income ratio is beginning to edge down.
Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target. We will continue to take a gradual approach, guided by incoming data. In particular, the Bank continues to gauge the economy’s reaction to higher interest rates. The Bank is also monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook."