Highlights:
- The overnight rate stands at 1.25%, the highest in the post-recession period
- The bank thinks the economy is operating close to its potential but noted that while slack in the labour market has diminished, wage growth remains modest.
- Uncertainty around NAFTA renegotiation was highlighted as risk to the economic outlook. A break-down of talks would likely lead to a more cautious approach from the Bank of Canada.
- The bank noted less monetary policy stimulus is likely over time although still sees the need for some level of accommodation to keep inflation on target. As such they will proceed cautiously and be guided by incoming data.
Our Take:
As expected, the bank raised its policy interest rate today by 25 basis point to 1.25%, the highest level in the post-recession period. The bank believes some policy accommodation will need to be maintained for the inflation to rise to its 2% target on a sustained basis although that does not preclude higher rates with the economy at capacity. The statement also highlighted the elevated uncertainty about the outlook coming from the NAFTA renegotiations which the bank addressed in its forecast by tempering the outlook for investment and trade. That said, on the economic outlook, the bank lifted its forecasts for both 2018 and 2019 looking for exports, business investment and spending on infrastructure to mitigate some of the impact of a moderation in housing and consumer spending. Once again, the bank upped its estimate of the economy’s potential growth rate (to 1.6% from 1.5%) reflecting a faster buildup in the capital stock and noted that the economy was close to capacity limits at the end of 2017.
Today’s statement provided a positive outlook with the bank stating that the fundamentals supporting the economy solidified since their last report. That said, concerns about the outcome of the NAFTA negotiations and the unsatisfactory pace of wage gains given residual labour market slack remain. Our forecast is for the economy to grow at an above-potential pace and inflation to hold at the 2% target later this year. Absent any negative NAFTA outcome, we expect the policy rate to rise to 2% by year end.
