The Central Bank raised its new target for the overnight rate to ¾% Wednesday, citing a confident financial outlook and above-potential growth.
This despite softened inflation, which the bank judges to be temporary.
“Governing Council judges that the current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy,” the Bank said. “Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities.”
The BoC estimates real GDP growth to moderate from 2.8% in 2017 to 2% in 2018 and 1.6% in 2019.
“Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed. The very strong growth of the first quarter is expected to moderate over the balance of the year, but remain above potential,” it said. “Growth is broadening across industries and regions and therefore becoming more sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding.
“Household spending will likely remain solid in the months ahead, supported by rising employment and wages, but its pace is expected to slow over the projection horizon,” the Bank continued. “At the same time, exports should make an increasing contribution to GDP growth. Business investment should also add to growth, a view supported by the most recent Business Outlook Survey.”
The Bank also cited strengthening global economy and a US economy that is solidly growing as factors for raising its rate.
Europe is also experiencing above-potential growth.
However, geopolitical uncertainty and softened world oil prices remain concerns.