Published: Wed, July 11, 2018
Finance | By Claude Patterson

The Bank of Canada monetary policy statement from July meeting

The Bank of Canada monetary policy statement from July meeting

The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar. Meanwhile, oil prices have risen.

"The escalation of trade actions was quite a part of our discussions, but we agreed very early on that it was not going to be the basis for our decision", Poloz told a news conference.

Canada's economy continues to operate close to its capacity and the composition of growth is shifting.

Scott Hannah says higher interest rates have also helped to cool down the country's real estate markets, helping future homeowners. Meanwhile, exports are being buoyed by strong global demand and higher commodity prices.

It said mounting trade tensions with the United States would have a larger impact on investment and exports than previously thought but it nudged up its estimate for second-quarter economic growth and pointed to rising inflation pressures.

The bank says persistent trade uncertainty and Canada's tariff fight with the United States will shave almost 0.7 per cent from economic growth by the end of 2020 - but it predicts the blow to be largely offset by the positive impact of higher oil prices.

Money markets see a almost 70 per cent chance of further Bank of Canada tightening by December.

The bank, however, noted in its report that despite "healthy" labour market conditions, employment growth and average hours worked have slowed down compared to last year's surge.

Governor Stephen Poloz said trade tensions were the biggest issue on the table.

The July projection also incorporates the estimated impact of tariffs on steel and aluminum recently imposed by the United States, as well as the countermeasures enacted by Canada. Although there will be hard adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest.

However, the central bank said it would take a gradual approach to future rate increases amid mounting tensions over trade with the USA, among other uncertainties.

The decision will likely prompt Canada's big banks to raise their prime rates, thereby passing on the rate increase along to their customers.

The next scheduled date for announcing the overnight rate target is September 5, 2018.

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