The Bank of Canada indicated that it’s in no rush to pursue aggressive interest rate hikes, citing “important unknowns” such as the future of Nafta as it raised borrowing costs for the third time since July.
At a rate decision earlier this week, central bank officials led by Governor Stephen Poloz sought to quell expectations Canada’s economic boom could prompt them to move quickly with additional hikes, downplaying any worries about the economy overheating and inflation rising above target.
For months, Poloz has been trying to gradually bring interest rates back to more normal levels amid strong growth and a surge in employment, without triggering an unwanted slowdown. He raised borrowing costs twice – in July and September – before adopting a more cautious tone and a pause in the last three months of the year.
“We didn’t walk into this as if it was a no-brainer,” Poloz told Bloomberg in Ottawa. “Given those uncertainties, of course the possibility of not moving at this time was in the air.”
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But a recent run of strong economic data was too hard to ignore and this week’s quarter-point increase brought the benchmark overnight rate to 1.25%, the highest since the 2009 recession.
“We are data dependent and there is no question the data on balance since October have been stronger than our base case,” Poloz said.
The improved outlook was evident throughout the rate statement and monetary policy report. The central bank painted a picture of an economy with inflation already close to target, output largely at capacity, a robust housing sector, and a faster-than-expected reduction in labour market slack.
Yet even with better economic data in 2017, there seems to be little concern the economy is poised to overheat. In the rate statement, central bank officials repeated their dovish language about moving ahead cautiously and warned they expect the economy will require continued stimulus.
“While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target,” the bank noted.
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