The Bank of Canada interest rate has officially increased for the third time this year.
On October 24, 2018, the Bank of Canada (BOC) overnight rate increased to 1.75%. The Bank Rate is correspondingly 2% and the deposit rate is 1.5%.
The increase was predicted by many economists, particularly after the North American Free Trade Agreement (NAFTA) deal was reached.
The BOC cited several reasons for the hike.
- The global economic outlook “remains solid.”
In particular, the U.S. economy is doing especially well and is expected to moderate.
- Trade policy uncertainty has been reduced.
With the new US-Mexico-Canada Agreement (USMCA), the BOC has seen increased business confidence and investment. They did note that trade conflict will continue to be monitored, particularly between the U.S. and China.
- The Canadian economy is doing well.
Economic growth is expected to average about 2% over the second half of 2018. The real GDP is projected to grow 2.1% this year and in 2019, then slow down to 1.9% in 2020.
- Household spending is steady.
“Households are adjusting their spending as expected in response to higher interest rates and housing market policies,” the BOC stated.
“In this context, household credit growth continues to moderate and housing activity across Canada is stabilizing. As a result, household vulnerabilities are edging lower in a number of respects, although they remain elevated.”
- Inflation is down.
The summer spike in gas prices, airfares, and minimum wages are decreasing and “should fade in early 2019,” according to the bank.
Inflation is expected to remain close to 2% through to the end of 2020.
The BOC will continue to closely monitor the economic conditions to determine future rate increases.
“Given all of these factors, Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target,” the BOC said.
“In determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook.”
The next BOC announcement, and the final one of 2018, is scheduled for December 5, 2018.
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