Interest rates held, economists react to dovish BoC

The Bank of Canada held interest rates steady at 1% and signalled a cautious approach to future rate rises.

The bank is forecasting a continued rise in inflation, reaching 2% in the second half of 2018 and for the economy to grow at above-potential with 3.1% for this year, 2.1% for 2018 and 1.5% in 2019.

Slack in the labour market including wage growth means there could be greater potential, however the high value of the loonie is a hinderance for exports.

TD Economics senior economist Brian DePratto said that the economy is in something of a sweet spot for the BoC meaning that there is no immediate urgency for a further rise in interest rates but also that the low interest environment is no longer necessary.

CIBC’s Nick Exarhos said that the dovish tone of the BoC means that he still expects the next rise in interest rates to be in the spring of 2018.

The Conference Board of Canada’s Chief Economist Craig Alexander and Economist Alicia MacDonald said that the dovish tone was surprising.

“With the economy quickly absorbing its excess capacity and growth in labour productivity suggesting a forthcoming acceleration in wage gains, we continue to believe that three more interest rate increases may be warranted before the end of 2018,” they said.

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