C$ rallies as BoC hikes rates despite NAFTA cloud

18 January, 2018, 14:10 | Author: Franklin Nunez
  • A new survey suggests that one in five Canadians has a credit card balance larger than their savings accounts

The central bank said underlying fundamentals are strong and would support more robust investment growth were it not for the heightened trade risks and increased incentive for businesses to move investment from Canada to the United States.

Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. It is possible that solid demand might be motivating increased inputs of capital and labor and the central bank would keep a close watch on developments on this front. On the other hand, the bank predicted that Canada will see a small benefit from the recent US tax changes thanks to increased demand.

The Monetary Policy Report assessed the key risks to the economic outlook.

"We had thought that the stagnation of the economy net-net since the two rate hikes in Q3 (judging from the monthly GDP readings), signs of softness in house prices in Toronto and Vancouver areas, coupled with the strength of the Canadian dollar and NAFTA uncertainties would have removed any sense of urgency from the central bank", analysts at BBH wrote in a note to clients.

Governor Stephen Poloz stressed during a news conference that the bank remains data dependent, although he conceded that a rate hike wasn't a "no-brainer" this time around because of the NAFTA talks. The level of business investment is expected to be 2% lower by 2020 than what would otherwise be the case due to trade-policy uncertainty, the Bank of Canada estimated.

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"It seems the Bank of Canada is leaning towards a more dovish stance and certainly playing up the concerns around NAFTA".

For 2017, it's now predicting three per cent growth, as measured by real gross domestic product, compared with its 3.1 per cent prediction in October.

The bank expects inflation to remain around 2 per cent in the months ahead. Also, the BoC expects the economy to expand 1.6 percent in 2019.

TD Bank, RBC and CIBC have all raised lending rates to customers in anticipation of the move.

Up until a couple of weeks ago, many forecasters still had doubts that Poloz would raise the rate Wednesday.

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Heading into the decision Wednesday, Scotiabank Economics forecasted three hikes totalling 75 basis points throughout 2018 and three more in 2019.

The gap between the two-year yield and its USA counterpart widened by 1.7 basis points to a spread of -26.2 basis points, its widest since December 18.

Moving forward, the bank predicted household spending and investment to gradually contribute less to economic growth, given the higher interest rates and stricter mortgage rules.

The next scheduled date for announcing the overnight rate target is March 7, 2018.

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