Bank of Canada hikes key interest rate by 25 bps, expects economy to expand 2.3 pct in 2018

The Canadian central bank hiked its interest rate today. The Bank of Canada raised its key rate by 25 basis points to 1.25 percent. The latest Monetary Policy Report was also released today, which gave a fresh view of the central bank’s economic outlook, noted TD Economics in a research report.

According to the central bank, the Canadian economy is expected to have grown at an average pace of 3 percent in 2017, while the economy is expected to expand 2.3 percent in 2018. Also, the BoC expects the economy to expand 1.6 percent in 2019.

The rate of potential growth continued to be the main concern for the central bank. It is possible that solid demand might be motivating increased inputs of capital and labor and the central bank would keep a close watch on developments on this front. In practical terms, although solid business investments have led the bank to upgrade the level of potential in 2017, the output gap is judged to be in the -0.25 percent to +0.75 percent range, implying that economic slack has been absorbed effectively.

The bank acknowledged that labor market slack is being absorbed more rapidly than previously expected. But wage data and other measures imply that, in contrast to an overall lack of spare capacity in the economy, some slack might still continue to be in labor markets.

The diminishing slack has made itself felt in core inflation measures. While temporary factors such as energy price swings will generate near-term noise, inflation is likely to trend close to the midpoint of the central bank’s 1 percent to 3 percent band over the forecast horizon, stated TD Economics.

The Monetary Policy Report assessed the key risks to the economic outlook. Subdued exports are the top risk in light of NAFTA uncertainty and recent imposition of tariffs by the U.S. Also, more rapid potential output, stronger U.S. growth and more robust consumer spending were seen as risks.

At 20:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was neutral 21.9585, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 11.6809. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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