Bank of Canada hikes interest rates to 1.25% from 1.00%

Author: Adam Button | Category: News

Bank of Canada raises interest rates for the third time in six months


  • Labor market slack being absorbed more quickly than anticipated
  • BOC 'will remain cautious' on future rate moves
  • No reference to CAD
  • NAFTA uncertainty 'weighing increasingly' on BOC outlook
  • Raises potential output growth estimate to 1.6% through 2019
  • Forecasts 3% GDP growth in 2017, 2.2% in 2018 and 1.6% in 2019
  • The OIS market had priced in a 90% chance of a hike
  • 26 of 27 economists on Bloomberg forecast a hike
  • The BOC hiked rates by 25 bps in July and in August
  • "There are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes."
  • Says consumption and residential investment have been stronger than anticipated
  • Exports have been weaker than expected
  • The quarterly Monetary Policy Report was also published with the decision
  • Full statement

Poloz and Wilkins will hold a press briefing at 11:15 am ET (1615 GMT).

USD/CAD is higher on the announcement with the market initially saying it's a dovish hike. There are two things that illustrate the idea that they will be on the sidelines for awhile. The first is NAFTA, which they mention twice as a risk and restraint on the economy currently. The second is the talk of potential growth. The BOC looks at the output gap so that means how much can the economy grow before it creates inflation. They've raised that assumption, so that makes hikes less needed along with 'promising signs'.

Here is how the guidance part of the statement changed.

December statement:

Based on the outlook for inflation and the evolution of the risks and uncertainties identified in October's MPR, Governing Council judges that the current stance of monetary policy remains appropriate. While higher interest rates will likely be required over time, Governing Council will continue to be cautious, guided by incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.

Today:

While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.

That's essentially the same in my view. I don't see this as dovish as the market does right now. There's nothing in the statement that will preclude the BOC from hiking again if the data remains strong.

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