Markets

Bank of Canada raises rate, predicts economic resilience despite trade risks

Bank of Canada raises rate, predicts economic resilience despite trade risks

The fourth rate increase since July 2017 comes as Canada grapples with the pressures of rising inflation and solid job growth despite an increasingly hostile USA trade policy that could choke off demand from Canada's largest export market.

"Although there will be hard adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest", the bank said in a statement.

"Governor Poloz did note the risk of a far greater shock to the economy should we see more tariffs (autos in particular) but suggested that they "can't make policy based on hypotheticals".

"The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar".

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.

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.

Poloz also argued it should be clear that interest rate adjustments are "ill-suited" to counteract all the effects of protectionist measures, given how these trade actions affect multiple areas of the economy.




Outside the country, the Bank of Canada has its eye on how widening global trade disputes, including an intensifying battle between the USA and China, will affect the world's economy.

In addition to tariffs, Canadian businesses must also contend with the uncertainty surrounding the stalled talks on NAFTA's renegotiation.

The Bank of Canada's quarterly update predicts the economy will show growth in 2019 and 2020, a better outlook than what was forecast in April. The economy's growth projection for this year remains at two per cent, the bank said.

Economists anticipate several more hikes this year and in 2019.

The Bank of Canada raised its target for the overnight rate a quarter-point to 1.5 per cent Wednesday.

It means consumers with variable rate mortgages or upcoming mortgage renewals will have to pay more. The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack.