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Bank of Canada hikes rates, shrugging off trade tensions

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Bank of Canada raises interest rate

The Bank of Canada raised its key overnight rate to 1.5 per cent. For more infographics, follow @yahoofinanceca on Instagram. (Yahoo Canada Finance)

By Andrea Hopkins

OTTAWA (Reuters) - The Bank of Canada raised interest rates on Wednesday as expected and signaled more rate hikes to come, saying that while mounting trade tensions with the United States were a concern, their impact on growth and inflation looked modest so far.

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 U.S. trade policy that could choke off demand from Canada's largest export market.

Governor Stephen Poloz said that while it was not easy for policymakers to set aside "all the talk" about trade, the bank hiked rates amid increasing confidence in its outlook, with Canada's economy firing on all cylinders despite the tensions.

"The escalation of trade actions was quite a part of our discussions, but we agreed very early on that it was not going to be the basis for our decision," Poloz told a news conference.

The bank's relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in nearly four weeks, and economists said they expected the central bank to hike again by year end.

"This rate hike signals that the Bank of Canada is determined to bring its benchmark overnight rate back to more normal levels and that the economy is strong enough to withstand further rate increases," Sherry Cooper, chief economist at Dominion Lending Centres, wrote in a research note.

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.

Poloz also signaled he was comfortable with how financial markets were interpreting the central bank's message, noting the hike was "highly anticipated." The bank had been criticized for a surprise rate hike last September.


A Reuters Poll last week showed a majority of economists had expected the increase.

The bank said U.S. 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.

"The impression is that they think the economy is soldiering through this uncertainty and it does look like this is not going to be the last (rate) move," said Doug Porter, chief economist at BMO Capital Markets.


(Additional reporting by Dale Smith and David Ljunggren in Ottawa and Fergal Smith in Toronto; editing by Bernadette Baum and Jonathan Oatis)