OTTAWA: The Bank of Canada raised interest rates for the first time in nearly seven years today, citing confidence in its outlook and a need to look through soft inflation, but said it will wait for more economic data before committing to its next rate hike.
In a decision that emphasised the lag between a rate hike and future inflation, the central bank raised its official interest rate by a quarter of a percentage point to 0.75 per cent but signalled it did not want to commit to a predetermined path of more hikes.
“Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities,” the bank said a statement.
Acknowledging the contradiction in raising rates amid low inflation, the bank said it will continue to analyse short-term price fluctuations “to determine the extent to which it remains appropriate to look through them,” and noted temporary factors like electricity rebates have kept a lid on prices.
It said it expects inflation to rise to close to 2 per cent by the middle of 2018 but said global structural factors could be contributing to low price pressures in Canada.
The bank raised its growth forecasts for 2017 and 2018 but trimmed its 2019 outlook, and projected the output gap would close around the end of 2017, earlier than it had anticipated in April.
It expects annual GDP growth of 2.8 per cent in 2017 and 2.0 per cent in 2018, up from the 2.6 per cent and 1.9 per cent it forecast three months ago.
While recent data have not been much stronger than policymakers’ forecast in April, the bank said its confidence in its outlook has been bolstered by the country’s economic performance despite geopolitical uncertainty and softer oil prices.
Still, with previous misplaced optimism in mind, policymakers signalled they did not want to get too far ahead of themselves by hinting at more interest rate hikes to come.
The bank said Canadian growth is expected to moderate but remain above its potential through 2017, becoming more sustainable as it spreads across industries and regions, and exports and business investment should boost economic activity in the months ahead.