Bank of Canada hikes key interest rate by 25 bps, another hike likely in October

The Bank of Canada hiked its key monetary policy interest rate by 25 basis points to 0.75 percent on Wednesday. The central bank upgraded the growth outlook again, expecting the economy to expand 2.8 percent in 2017 and 2 percent in 2018. However, the BoC revised down its 2019 forecast to 1.6 percent due to weaker expectations for government spending and net trade. In line with the upgrade, the Bank of Canada pulled forward its estimate of when the output gap will close to “around the end of 2017”.

On the inflation front, the central bank views recent softness as mostly temporary, indicating towards food price competition, and other factors as holding back overall price growth. The central bank expects that as these effects wane, inflation will return to ‘close to’ 2 percent by mid-2018, noted TD Economics in a research report.

Consumption is likely to have a larger role in contributing to the economic growth, while net trade is now expected to act as a drag on the economy. The central bank continues to expect housing activity to underpin the overall growth in 2017, with a weaker performance expected thereafter.

“We believe that another rate hike is likely at the Bank of Canada's October monetary policy decision, but a slightly slower pace of one 25bp hike every six months or so is likely thereafter”, added TD Economics.