By: Luke Jones, Published on January 27, 2018 10:07 AM, Last Update on January 27, 2018 07:09 AM
It is a good time for the Canadian economy and to reflect the upturn, the Bank of Canada has raised the interest rate for the third time since the summer. However, the bank has also cautioned for the future, warning about uncertainties around NAFTA.
In an update, the central bank revealed the economy was surprisingly solid and decided to raise the interest rate by one per cent to 1.25 per cent. The bank had previously raised rates in July and September 2017.
More increases are likely said the bank, but a long term outlook is hard to predict due to uncertainty over the North American Free Trade Agreements and some domestic economic concerns.
The bank said “some continued monetary policy accommodation will likely be needed” to keep the economy moving at full potential.
NAFTA’s renegotiation remains a major concern, although the bank said growth in 2017 offset the worry enough for an interest rate increase to be introduced.
“Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity,” the bank said in a statement.
“Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. Business investment has been increasing at a solid pace, and investment intentions remain positive.”
The bank predicts economic growth will slow as household spending will dampen behind stricter mortgage rules and the higher interest rate. Canadians have a high level of household debt and are spending a disproportionate amount of income on housing. Consumption will likely be impacted by these factors.
“Today’s rate hike was a rear-view mirror move, but the Bank of Canada hints that the view out the front window isn’t quite as sunny,” CIBC chief economist Avery Shenfeld wrote in a research note to clients.
“We share the Bank of Canada’s view that higher rates will be needed over time. But perhaps not as fast and furious as the market was starting to think. The bank’s statement put NAFTA uncertainties right up front.”