Bank of Canada raises overnight rate target to 1 ½ per cent

Image of DailyFX economic calendar

Image of DailyFX economic calendar

USA tariffs on the auto sector's integrated cross-border supply chains would have "large impacts on investment and employment", the Bank of Canada warned Wednesday in its accompanying monetary policy report.

The Bank of Canada raised its benchmark interest rate by 25 basis points to 1.50 per cent, the fourth hike since last summer.

BNN Bloomberg speaks with PIMCO's Ed Devlin about his take on the Bank of Canada's decision to raise rates amid ongoing economic challenges the country is facing.

"Despite hiking rates today, the Bank of Canada is in no rush to continue pushing rates higher given the uncertainties surrounding trade, lingering concerns about housing and household debt, and renewed belief that there's some labour market slack".

The bank's relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in almost four weeks, and economists said they expected the central bank to hike again by year end.


The Bank said Canada's economy is operating "close to capacity", implying that it expects to see inflation rise in the future. Talks to renegotiate the North American Free Trade Agreement stalled earlier this year, and Canada imposed retaliatory tariffs this month.

"This should be consistent with a more firm pricing for another hike this year", said Alvise Marino, FX strategist at Credit Suisse in NY.

Canada, which has its own trade dispute with the United States, exports many commodities and runs a current account deficit so its economy could also be hurt if the flow of trade or capital slows. It's expected to settle back down to 2% in the second half of 2019.

CIBC chief economist Avery Shenfeld wrote in a research note Wednesday that "there are worries ahead, growth hasn't been stellar, but the backdrop has been just good enough for the Bank of Canada to nudge rates a quarter point higher".

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