NEW Bank of Canada Raises Interest Rate to 1.25%


The Bank of Canada announced Wednesday that it raises its key interest rate by a quarter percentage-point to 1.25 percent. However, it signaled a cautious approach to further rate increases, warning that uncertainty tied to the future of the North American Free Trade Agreement is likely to exert a drag on growth. The interest rate of the central bank is being aligned with the economy of Canada which seems to be getting better eventually.

The price of oil, one of Canada's major exports, rose ahead of the release of US petroleum data that was expected to show a ninth straight weekly drawdown in crude inventories. But trade-policy uncertainty would slow growth in both categories, it said.

The central bank raised its forecast for 2018 growth to 2.2 per cent from 2.1 per cent, while it also bumped up its forecast for 2019, after an estimated 3.0 per cent expansion in 2017. "However, the uncertainty surrounding the future of Nafta is clouding the economic outlook".

The bank was widely expected to raise its key rate after economic data in recent months showed gross domestic product growing, the job market healthy and the cost of living ticking higher. Prior to the Bank of Canada's move, their rates were all 3.2 per cent. That would follow its last two quarter-point hikes in July and September.

Canada sends roughly three-quarters of its exports to the USA, or the equivalent of 20% of total economic output. Talks have taken a contentious turn, and will resume next week in Montreal.

"I believe it would be net negative for both Canada and for the US", he said of the theoretical demise of NAFTA, "but to actually quantify that is very hard, because every sector is affected differently".

Developments on the Nafta and US policy front prompted the Canadian central bank to incorporate a "negative judgment" on capital spending and trade.

Canadian government bond prices were mixed across the yield curve, with the two-year up 2 Canadian cents to yield 1.764 percent and the 10-year falling 15 Canadian cents to yield 2.19 percent.

The bank also introduced into its projection the potential negative effects of recent USA tax reforms, estimating they will take another 0.5 percent off Canadian investment by the end of next year.

The threat of greater protectionism remains the most significant risk to Canada's export-dependent economy, the bank said.

But, Wednesday's hike, might not translate to a more aggressive central bank this year, according to analysts. Wage-growth pressures, it said, have picked up but "remain modest".

"Although their investment intentions indicate plans to boost spending, respondents to the Business Outlook Survey are increasingly concerned about the ongoing NAFTA negotiations and rising protectionism more generally", the central bank said, referring to its quarterly survey.

The hike acknowledges that recent data has come in stronger than the bank had expected, inflation is close to the bank's 2 percent target, and the economy is now operating at full potential with no output gap.

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