The Central Bank of Canada announced on Wednesday morning that it will be maintaining its overnight lending rate at 1.25%
Correspondingly, the bank rate is 1.5% and the deposit rate is 1%.
National accounts data indicates that the Canadian economy grew by 3% over the past year, increasing the real GDP as per the projection stated in the Bank’s MonetaryPolicy Report in January. GDP growth stalled over the last quarter, mainly due to higher imports and declining third quarter exports. The gain in imports points to stronger business investments, which will positively contribute to the economic capacity.
Meanwhile in the United States, global growth remained broad-based, with government spending and tax cuts anticipated to boost economic growth over the next two years. On the other hand, NAFTA trade deals are a growing source of uncertainty when it comes to global and Canadian outlooks. The latest talks in Mexico City ended with Canada and Mexico opposing the US’s proposed tariffs on aluminium, metal, and a 5-year sunset clause.
What is an overnight lending rate? The overnight rate is the interest rate used when major financial institutions exchange one-day (or “overnight”) funds among themselves. The target level for this rate can influence other interest rates (such as mortgage rates) and currency exchange rates.
New mortgage guidelines and other policy measures have softened demand at the beginning of this year, the full extent of which will only be felt over the next few months. The Bank has continued to monitor economic sensitivity to raises in interest rates, notably pointing out that credit growth has decelerated over three consecutive months.
Inflation is running parallel to the 2% target, while core measures of inflation have edged up due to an economy operating near capacity. The inflation rate is fluctuating due to short term factors related to electricity, minimum wages and gasoline. Wage growth remains lower than the average in an economy with no labour market slack.
Effects of the recent federal budget will also be incorporated in the Bank’s next projection.
This is the third time since June 2017 that the central bank has raised its interest rates, after almost 7 years of ultra-low rates.
While the strong economic outlook over the next few months should warrant a hike in interest rates, the government will remain cautious when it comes to doing so, in light of incoming data on the economy’s sensitivity to such changes.
The next interest rate announcement by the Bank of Canada’s next interest rate is scheduled for April 18.
Cited: Bank of Canada Press Release
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