The Bank of Canada has just announced its interest rate decision. After a previous 1.00% and an expectations of 1.25%, the central bank is now raising the key interest rate to 1.25%.
US dollar vs. Canadian dollar rises by 90 pips in an initial reaction. However, the upward movement began shortly before 10 AM in Canada. Did someone know anything some seconds before publication?
According to the Bank of Canada’s latest statements, the economy is running at full speed and working close to capacity utilization:
Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.
GDP should cool down a little bit:
In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.
The next statement is very important: Consumption and real estate are currently running stronger than expected by the Bank of Canada:
Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. Business investment has been increasing at a solid pace, and investment intentions remain positive.
However, a slowdown is expected in this area because interest rates are already rising and the regulations for real estate loans are stricter:
Looking forward, consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines.
Inflation is close to 2%. The economic outlook may still bring even higher interest rates over time, but one pays attention to the equilibrium (interest rates that are too high choke off the economy). Quote:
In this context, inflation is close to 2 per cent and core measures of inflation have edged up, consistent with diminishing slack in the economy. The Bank expects CPI inflation to fluctuate in the months ahead as various temporary factors (including gasoline and electricity prices) unwind. Looking through these temporary factors, inflation is expected to remain close to 2 per cent over the projection horizon.
While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.
20 minutes after publication through Bank of Canada USDCAD increased 90 pips.