Bank of Canada expected to hike key interest rate amid strong economy

18 January, 2018, 14:09 | Author: Gladys Mathis
  • ForexLive Americas FX news wrap: Bank of Canada hikes rates

Anticipating Wednesday's rate hike by the Bank of Canada, all of Canada's Big Six banks had already raised their listed five-year mortgage rates by 15 basis points to 5.14 per cent, and that is going to make it all the more hard for home buyers to qualify for mortgages, particularly with the new stricter guidelines.

The Canadian dollar changed little against the greenback in a Wednesday's seesaw session after the Bank of Canada hiked interest rates and indicated confidence in the outlook for the economy, but sounded a cautious tone on the future of NAFTA.

While the central bank signalled more rate increases are likely over time, it noted the unknowns surrounding the future of the North American Free Trade Agreement - and the potential negatives for Canada - were casting a widening shadow over its outlook. However, it cautions about the substantial improbability linked to the possible changes of policy by the USA, which is its major dealing partner.

All eyes will be on the Bank of Canada this morning as it makes its latest scheduled interest-rate announcement. The central bank sets rate policy with the aim of reaching and maintaining 2% inflation. On the flip side savers can expect to earn more, too.

The promise by Trump to have the policy amended together with his patriot vow which would cost export and Canadian investment.

The central bank raised its forecast for 2018 growth to 2.2 per cent from 2.1 per cent, while it also bumped up its forecast for 2019, after an estimated 3.0 per cent expansion in 2017.

In explaining the hike, the bank said in a statement that inflation was close to target and the economy was operating roughly at capacity.

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Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth.

But while global commodity prices continue to grow, the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices, the bank said.

The claim alleges the banks manipulated the Canadian dealer offered rate - which reflects what rate contributors are willing to lend to corporate clients using an instrument called a bankers' acceptance - from at least August 9, 2007, to June 30, 2014.

Economist Frances Donald with Manulife agrees with that assessment, telling CBC News in an interview that while the market was expecting as many as three hikes this year, the situation is fluid.

While real GDP growth is expected to slow to 2.2 per cent in Canada in 2018 and 1.6 per cent in 2019, growth is expected to remain above potential through the first quarter of 2018, before slowing.

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.

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