The Bank of Canada is poised to raise interest rates, just not today.
Governor Stephen Poloz and his deputies on the Governing Council ended a couple of weeks of deliberations on April 18 with a decision to leave the benchmark unchanged at 1.25 per cent for a second consecutive policy meeting.
But policy makers are close to pulling the trigger, either at their next interest-rate announcement in May or the following one in July.
The central bank released new forecasts that have inflation running hotter than the 2-per-cent target through 2020, suggesting policy makers must soon lift borrowing costs to keep a lid on prices.
Wages, which had been stagnant, are showing signs of life, a condition that Poloz said last year would have to be met before he would move interest rates significantly higher. Policy makers called domestic consumption “robust,” and they boosted their outlook for the U.S. economy, implying that there is plenty of demand for Canadian goods and services at home and abroad.
“Some progress has been made on key issues being watched closely by Governing Council, particularly the dynamics of inflation and wage growth,” the Bank of Canada said in statement. “This progress reinforces Governing Council’s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target.”
The last part of that quotation provides important context.
While an interest-rate increase is likely over the next few months, it is equally likely that policy makers will follow it with another long pause. They repeated that they intend to “remain cautious,” citing worries over the sensitivity of highly indebted households to higher interest rates and the inability of exporters to keep pace with their rivals in global markets.
Exports have underwhelmed, and the central bank is skeptical they will rebound with any amount of vigor. That’s partly because of fears over what U.S. President Donald Trump has in store for the North American Free Trade Agreement, and partly because production costs in Canada are higher than in other countries.
“Canadian exports will strengthen as foreign demand increases, but not sufficiently to recover the ground lost during recent quarters,” the Bank of Canada said. “Both exports and investment are being held back by ongoing competitiveness challenges and uncertainty about trade policies.”
Still, overall, Canada’s economy is in decent shape.
The Bank of Canada raised the rate at which it thinks the economy can grow without triggering inflation to 1.8 per cent from 1.4 per cent because more Canadians are working and contributing to gross domestic product.
And the central bank foresees GDP growing faster than that rate in the years ahead. It sees growth of 2 per cent this year and 2.1 per cent in 2019, a significant revision from a previous estimate of 1.6 per cent.
That means upward pressure on inflation, and policy makers will have little choice but to respond.
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