Canada: BoC stands pat in April despite higher inflation; rate hike appears likely in May
On 18 April, the Bank of Canada (BoC) left its target for the overnight rate unchanged at 1.25%, as widely expected by market analysts. The decision to hold rates came as downside risks to the economy have persisted in recent months, while recent inflationary pressures have remained broadly in line with the Bank’s forecasts.
In response to weaker-than-expected growth in the first quarter, the Bank revised its projections and now expects growth of 2.0% in 2018, down from 2.2% in January. For 2019, the Bank hiked its growth forecast to 2.1% from an earlier 1.6%.
Headwinds from a cool-off in the housing market and setbacks to the external sector as a result of transportation bottlenecks and capacity constraints weighed on an otherwise healthy economy in the first quarter. In addition, uncertainties over NAFTA renegotiations and concerns over global trade have further clouded the short-term outlook. Also weighing on the Bank’s decision were heavily-indebted consumers, who have been grappling with higher borrowing costs since the Bank began tightening rates last year. On the other hand, headline inflation landed just above the Bank’s midpoint target of 2.0% in February, and temporary pressures from higher gasoline prices and minimum wage increases are expected to drive up inflation further in the coming months. That said, the Bank eventually expects price pressures to settle back towards target by next year.
The tone of the communiqué was broadly dovish, noting that risks to the economy—including ongoing NAFTA tensions and consumers’ acute sensitivity to higher interest rates—remain tilted to the downside and that monetary policy would need to remain accommodative to ensure on-target inflation. Although Bank officials made it clear that higher rates would be necessary over time, they did not provide a specific timeline for future tightening. That said, the Bank’s cautious stance towards rising inflation suggests a rate hike is very likely in the coming months, and a number of our panelists expect the Bank to raise rates at least two more times this year.
The Bank’s next monetary policy announcement is scheduled for 30 May.