Bank of Canada hikes key monetary policy rate to 1.50 pct

The Canadian central bank, Bank of Canada hiked its key monetary policy rate to 1.50 percent today, the fourth hike in 2018. The central bank, in its statement, explained that the BoC struck a neutral to slightly hawkish tone.

On the negative side, trade tensions were front and centre, with the effect of uncertainty on the outlook now larger. Underlying wage growth is expected to be at 2.3 percent, a sign that labor market slack still continues. On the other hand, BoC’s assessment of the economy was fairly constructive, seeing housing markets stabilize and strong demand growth driving business investment. The statement noted that “higher interest rates will be warranted to keep inflation near target and [the Bank of Canada] will continue to take a gradual approach, guided by incoming data.”

The latest Monetary Policy Report showed that the central bank forecasts growth of 2 percent in 2018, followed by 2.2 percent in 2019 and 1.9 percent in 2020. Meanwhile, consumption is likely to play a smaller role in 2018 with business investment doing more of the work, noted TD Economics in a research report.

The negative effect on the domestic economy from U.S. tax reform and trade policy uncertain has been updated, with uncertainty likely to be a larger drag on the projection. Business investment and exports are likely to come in 2.5 and 1.2 percentage points lower than would otherwise have been the case.

The outlook for inflation continues to be benign. Inflation is likely to average about 2.5 percent over the second half of this year; however, this is due to temporary factors, with inflation anticipated to be roughly back on target by the end of next year.

“All told, today's statement, outlook, and press conference are all consistent with a Bank that's committed to a rate hike cycle, but leaves sufficient room to adjust to evolving events. We maintain a slightly cautious growth outlook – we still look for more hikes, but think a gradual pace of one hike roughly every two quarters still makes the most sense”, added TD Economics.

At 18:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was slightly bearish at -55.4599, while the FxWirePro's Hourly Strength Index of US Dollar was highly bullish at 172.583. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex