Central bank hikes rate, says tariffs already in place to have modest impact

Bank of Canada has its eye on how widening global trade disputes will impact economy

The Bank of Canada raised its benchmark interest rate Wednesday in an economy that it predicts will remain resilient even as it faces an even bigger bite from deepening trade tensions.

The rate hike was the central bank’s first interest rate move in six months and lifted the trend-setting rate to 1.5 per cent, up from 1.25 per cent. It was the bank’s fourth rate increase over the last 12 months.

The decision, a move that will likely prompt Canada’s big banks to raise their prime rates, arrived in the middle of a trade dispute between Canada and the United States that’s expected to hurt both economies.

The bank took the step even as it predicts larger impacts from the widening trade uncertainty, particularly after the United States imposed steel and aluminum tariffs on Canada and Ottawa’s retaliatory measures. The tariff fight, the bank estimated, will shave nearly 0.7 per cent from Canada’s economic growth by the end of 2020.

However, the bank expects the negative blow of the trade policies recently put in place to be largely offset by the positives for Canada from higher oil prices and the stronger U.S. economy.

“Although there will be difficult adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest,” the bank said in a statement.

But in addition to steel and aluminum tariffs, Canada is facing a significant trade-related unknown that many believe would inflict far more damage on the economy: U.S. duties on the automotive sector

U.S. 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, however, didn’t quantify the possible effects of auto tariffs on Wednesday. Governor Stephen Poloz has signalled in the past that he’s focused on data he can measure rather than the impacts of trade policies that have yet to materialize.

Canadian businesses must also contend with the uncertainty surrounding the difficult renegotiation of the North American Free Trade Agreement, for which talks have stalled.

The Bank of Canada also has its eye on how widening global trade disputes, including an intensifying battle between the U.S. and China, will affect the world’s economy. It warns that “escalating trade tensions pose considerable risks to the outlook” at the global level.

Even with the trade issues, the Bank of Canada is now predicting slightly stronger growth for Canada over the next couple of years, according to updated projections it released Wednesday in its quarterly monetary policy report.

It expects real gross domestic product to grow 2.2 per cent in 2019, up from its April call of 2.1 per cent, and by 1.9 per cent in 2020, compared with its previous prediction of 1.8 per cent. The economy’s growth projection for this year remains at two per cent, the bank said.

Looking ahead, the bank predicts Canadian growth will continue to see bigger contributions from exports and business investment, which were both stronger than expected in the first three months of the year.

At the same time, household spending will represent a smaller and smaller share of overall growth due to the dampening effects of higher interest rates and stricter mortgage rules, it said.

Leading up to the announcement Wednesday, Poloz was widely expected to raise the interest rate following a run of healthy economic numbers, including the Bank of Canada’s own survey on business sentiment, tightened job markets and growth in wages.

Moving forward, the bank said it expects higher interest rates will be necessary over time to keep inflation near its target, however, it intends to continue along a gradual, data-dependent approach.

The country’s inflation rate is expected to rise to 2.5 per cent — above the two per cent mid-point of the bank’s target range — due to temporary factors such as higher gasoline prices before settling back down to two per cent in the second half of 2019.

Andy Blatchford, The Canadian Press

Like us on Facebook and follow us on Twitter.

Just Posted

UPDATE: Several fires burning in Lower Similkameen

At least one fire near Keremeos was caused by lightening

911 jams causes panic among residents

RDOS chair received several calls and texts from panicked residents unable to get through to 911

Update: Lightning sparks blaze above Summerland

Firefighters are battling the small fire from the area that occurred Tuesday shortly after 7 p.m.

Lightning strikes across B.C. Interior

Residents are being asked to go inside until last rumble of thunder

Firefighters respond to roadside brush fire

Fire next to Highway 97 being brought under control.

Trudeau asks transport minister to tackle Greyhound’s western pullout

Prime Minister Justin Trudeau says he’s asked Transport Minister Marc Garneau to find solutions in Greyhound Canada’s absence.

Lightning strikes West Kelowna condo

Fire crews were called to a building on Carrington Road Tuesday night

Lightning sparks wildfires in Vernon

Tuesday night storm causes wildfire in BX and residential fire in East Hill

Crash closes Highway 5A in both directions

A collision has shut down Highway 5A about 22 kilometres south of the junction with Highway 97C

UPDATE: Smoke rising from Okanagan Mountain Park hills

Lightning may have sparked a fire in the hills across from Peachland

UPDATE: Crews battle wildfire near Big White

Joe Rich Fire Department responding alongside Big White Fire Department and provincial crews.

Hub for mental health and addictions treatment opens at B.C. hospital

St. Paul’s Hospital HUB is an acute medical unit that includes 10 patient beds

Pike Mountain fire continues to grow – quadruples in 24 hours

Fire threatens area consumed in 2017 by a 3,500 hectare blaze

Vernon Knights hire Van Horlick

New head coach of Junior B franchise in Armstrong

Most Read