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Bank of Canada Raises Rates, Warns on Risk from U.S.-China Trade Dispute

Published 10/24/2018, 10:00 AM
Updated 10/24/2018, 10:12 AM
© Reuters.  BoC hikes interest rates to 1.75% - The Bank of Canada increased interest rates as expected on Wednesday on the back of a solid global economic outlook, although policymakers voiced their concern over the risk of the trade conflict between the U.S. and China.

The BoC moved ahead and raised interest rates by a quarter of a point to 1.75%, marking the fifth rate hike since July 2017, as policymakers attempt to keep a booming Canadian economy in check.

“However, trade conflict, particularly between the United States and China, is weighing on global growth and commodity prices,” the bank warned.

The BoC commented that rates “will need to rise to a neutral stance to achieve the inflation target”, although the pace would depend on how the economy is adjusting to higher interest rates, given the elevated level of household debt.

Markets expect two more rate hikes in 2019, as Canada’s economy will continue to grow faster than its potential over the coming quarters thanks to U.S. fiscal stimulus boosting demand for its exports.

A deal at the end of September to revamp the North American Free Trade Agreement (NAFTA) has reduced the risk of Canada’s exports being disrupted, setting the stage for more tightening from the central bank.

“The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment,” the BoC explained.

The BoC’s Business Outlook Survey, which was released last week and took place even before the trade deal between the U.S. and Canada was reached, revealed that Canadian companies are expecting to ramp up investment as business sentiment remains at elevated levels.

Traders will look for further details on the path for monetary policy at the press conference by BoC Governor Stephen Poloz, which begins at 11:15 AM ET (15:15 GMT).

At the end of September, Poloz insisted that the central bank would continue to gradually increase rates as it did not want to let inflation momentum build.

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