The Bank of Canada opted to raise its target for the overnight rate 25 basis points to 1.5 per cent this morning. In the statement accompanying the decision, the Bank cited that the economy is operating close to capacity and as a result inflation is expected to edge higher over their two year forecast horizon. The Bank noted that incoming data suggests housing markets are starting to stabilize after the implementation of the B20 stress test.
With inflation rising to the Bank’s two per cent target and the Canadian economy operating at or near capacity, the Bank of Canada is unlikely to be finished tightening. At its current level, the overnight rate is about 150 basis points below the 3 per cent rate the Bank would ultimately prefer it to be. However, the Bank may take a brief pause to assess the impact of its past tightening as well as the ongoing effects of the B20 stress test on housing markets. It may also be dissuaded from further tightening should there be a further escalation in trade tariffs from the United States. Overall, we expect at least one more round of rate increases from the Bank of Canada in 2018.
Source – BCREA