The Bank of Canada raises the quarter-point interest rate

Governor of the Bank of Canada Stephen Poloz, put aside his worries about trade wars and continued to raise interest rates, with inflation remaining at its highest level in seven years.

The central bank of Ottawa raised its benchmark quarter point rate to 1.5% on Wednesday, the second rise this year and the fourth in the last 12 months.

The statement introduces no new "docile" language, and officials have only reiterated that rates will have to increase, albeit gradually, to keep price pressures under control.

The measure signals decision-makers who are determined to bring rates back to normal levels and to rely on the ability of the Canadian economy to cope with both higher borrowing costs and higher levels of stress. increasing trade.

It also suggests that the benefits to Canada of the solid growth of the United States in fuel exports and business investment outweigh the costs and uncertainty imposed by Donald Trump's trade policies.

"The Bank of Canada has decided that the things we know are clear, and this allows us to overcome the concerns we have about the potentially negative outcomes of things we do not see, in other words known knowledge goes beyond known unknowns ". said Jeremy Kronick, deputy director of research at CD Howe Institute.

The change has been totally adjusted by the markets. Investors also anticipate additional increases every six months until the benchmark rate stabilizes around 2 or 2.25% by the end of 2019, in line with the gradual orientation of the central bank. .

The Canadian dollar rose immediately after the release of the statement, gaining up to 0.4%, before falling back and the rate just oscillated between US $ 3,124 and US $ 11,08. in Toronto. The currency declined 1.6% over the past year, despite rising oil prices.

In its report and monetary policy report, the central bank describes a near-capacity economy in which higher oil prices, a weaker Canadian dollar, and higher-than-expected corporate investment completely offset the negative impact. of commercial uncertainty. Exporters, on the other hand, are doing better than expected due to strong foreign demand.

The Bank of Canada's forecast will average 2% over the next three years, unchanged since its last estimate in April, and slightly higher than what government officials believe to be the long-term sustainable rate for the Bank. 39; economy. The latest growth forecasts incorporate negative adjustments that capture greater business uncertainty.

The central bank also raised its estimates of inflation, but expressed confidence that it would recover back to 2% after temporary factors pushed the rate above the target .

"The Board of Governors expects higher interest rates to be guaranteed to keep inflation close to the target and will continue to adopt a gradual, guided approach. by the data received, "said the bank.

Rotation

Another positive fact, officials pointed out that the composition of growth shifted from consumption to export and to business investment, implying that they believe that there is no need for growth. Expansion is more sustainable.

The rising cost of borrowing is also putting the Bank of Canada more in tune with the Federal Reserve and investors are now waiting for the Nordic nation to keep pace with rising rates in the south. from the border next year.

The Bank of Canada lags behind the Fed's rate hikes since the collapse of oil prices in 2015, marking a rare divergence given the close relationship between the Canadian economy and the Canadian economy. United States.

Standardization of rates is a delicate task for Poloz. With inflation already above the 2% target set by the central bank and continuing to rise, and with financial conditions still very low, the head of the central bank must control the pressures on the central bank. wages and prices.

At the same time, too fast and too fast movement could unintentionally trigger a slowdown at a time when the economy is flooded with risks. And the Bank of Canada would be cautious about ahead of the Federal Reserve if the slowdown in global growth had an impact on the US market.

What our economists say "As expected, the BoC currently excludes the latest series of commercial tariffs." However, if rising trade tensions slow the pace of the Federal Reserve, loonie appreciation could toughen financial conditions and allow the BoC to pause later this year, "said Tim Maheday , economist at Bloomberg.

However, gradualism continues to be on the agenda, and the Bank of Canada has repeated most of the concerns and unknowns that it believes prevent it from occurring. accelerate standardization, in addition to trade.

] The authorities reiterated, for example, how the economy became more sensitive to higher interest rates because of high levels of debt, which would dampen any upward momentum. They also believe that there is still excess capacity in the labor market and the Bank of Canada believes that the underlying pressures on wages are in place.