Investing.com - The Bank of Canada raised its benchmark interest rate by a quarter point on Wednesday, although it warned of volatile growth prospects and uncertainty surrounding trade tensions with the U.S.
The BoC lifted its overnight cash rate to 1.50% from the prior 1.25%.
That’s its fourth rate hike over the past year, in line with the forecast of 14 out of 18 economists surveyed by Bloomberg.
The BoC noted that Canada’s economy continues to operate close to its capacity and the composition of growth is shifting, although it warned that “temporary factors are causing volatility in quarterly growth rates”.
The central bank forecast that the Canadian economy would grow 2.8% in the second quarter before moderating to 1.5% in the third. Overall, the BOC expects average growth of 2% for this year through 2020.
“Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors,” the BoC noted.
It also projected CPI inflation to edge up further to about 2.5% before settling back to 2% by the second half of 2019.
The central bank said that its projection incorporates an estimate of the impact of trade uncertainty on Canadian investment and exports.
“This effect is now judged to be larger, given mounting trade tensions,” the BoC stated.
Although Wednesday’s rate hike was already priced in, most analysts believe that the BoC will tighten at a gradual pace as the central bank observes developments in trade tensions.
Odds of an additional hike by the end of this year are priced in at around 50%, while economists predict that a further two increases will take place over the next 12 months, bringing rates to 2.0%.
The central bank's governor, Stephen Poloz, will hold a press conference at 11:15 AM ET (15:15 GMT) where he is expected to outline the BoC’s outlook.