Bank of Canada: key interest rate rises to 1.5% despite trade tensions

OTTAWA | Despite the uncertainty caused by trade tensions with the United States, the Bank of Canada raised its key interest rate to 1.5% on Wednesday, a sign that the Canadian economy is healthy enough to face the crisis. .

This quarter-point increase is motivated primarily by the fact that the Canadian economy "continues to run at near full speed", due to the stronger-than-expected strength of the US economy and sustained global growth.

The various Canadian banks, including BMO Bank, TD Bank, Royal Bank, Laurentian Bank and Desjardins, responded quickly in the afternoon by increasing their prime rate by 0.25 percentage points to 3.45 points. % at 3.70%. These new rates will be effective as of Thursday.

Impacts of the tariff war

Despite an encouraging overall picture, the shadow of a trade war with the United States hangs over the Bank of Canada's projections. The latter even identifies trade protectionism as the "main threat to the global outlook".

In its new Monetary Policy Report, the institution estimates that US steel and aluminum tariffs will reduce Canadian exports by $ 3.6 billion. Canadian countermeasures will reduce imports to the country by $ 3.9 billion.

The Bank speaks of a "moderating effect" that will cut GDP by two-thirds, but may be mitigated by the ability of Canadian firms to turn away from the United States.

"While there are difficult adjustments ahead for some sectors and their workers, the effect of these measures on growth and inflation in Canada should be modest," she said on Wednesday.

The renegotiation of the North American Free Trade Agreement (NAFTA) and the possibility of US tariffs on the auto industry also add to the uncertainty.

Further increases to come

In its new report released on Wednesday, the Bank notes that Canada's GDP is expected to grow by an average of 2% each year until 2020, supported by foreign demand.

Canadian exports and business investment were stronger than expected in the first quarter of 2018, although constrained by US tariffs. The real estate market is also showing signs of recovery after posting some weakness early in the year.

In fact, domestic inflation remains close to the Bank's 2% target.

South of the border, US growth reached 3.1% in 2018, driven in particular by larger than expected private investments and a strong increase in employment. Global growth, it must reach 3.75% this year.

Because of the good posture of the Canadian economy, the key rate was raised to 1.25% last January, a third increase since July 2017.

Confident, the Bank projects that interest rates will continue to rise, but the pace of this increase will include the response of businesses and consumers to trade tensions.

The next decision on the key rate is expected on September 5th.