Bank of Canada keeps interest rate on hold, likely to hike in July

The Canadian central bank kept its key monetary policy interest rate on hold at 1.25 percent today, as was widely anticipated. The statement released with the decision had a hawkish tone, implying the next rate hike is not far off.

Economic developments since April are seen consistent with the central bank’s view, albeit for the first half overall, given an expected first quarter outperformance, noted TD Economics in a research report. Housing activity is likely to rebound as the year continues, aided by increasing incomes. The central bank sees consumption continuing to play a significant role, implying that household finances are not particularly pinched by recent rate hikes.

Some upside is seen for the U.S., but trade policy uncertainty continues to be a dampening factor. Emerging market stresses were also emphasized, while recent oil price moves were characterized as driven by geopolitical developments.

The Bank of Canada projects inflation to surpass its earlier projections because of gasoline prices, but they will look through this transitory factor. Overall, the positives appear to outweigh the negatives.

With the Canadian economy set to outperform the central bank’s earlier expectations and signs of life in all sectors bar housing, economic conditions favour another interest rate hike, noted TD Economics. The central bank is expected to hike its policy rate during its next meeting in July.

At 21:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was neutral at 3.7518, while the FxWirePro's Hourly Strength Index of US Dollar was bearish at -76.9314. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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