Bank of Canada

The Bank of Canada chose to stand pat on Wednesday—but it also offered fresh, yet cautious, warnings to Canadians that rate increases may be on the way.

The central bank has now left the overnight rate target locked at 1% for two straight policy announcements, after the strengthening economy prompted it to raise it twice in the summer.

In announcing today’s decision, the central bank pointed to several recent positives that could support higher rates in the coming months. Those included encouraging job and wage growth, sturdy business investment, and the resilience of consumer spending despite higher borrowing costs and Canadians’ heavy debt loads.


On top of that, there’s increasing evidence in the economic data that the benefits from government infrastructure investments have begun to work their way through the economy, the central bank said.

On the other hand, the central bank noted exports have slipped more than expected in recent months after a powerful start to the year, although it continues to predict trade growth to pick up due to rising foreign demand.

The BoC also said international outlook continues to face considerable uncertainty mostly because of geopolitical- and trade-related factors. “While higher interest rates will likely be required over time, [the central bank’s] governing council will continue to be cautious,” the central bank said in a statement Wednesday that accompanied its decision.

It will be “guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity and the dynamics of both wage growth and inflation.”

The central bank said inflation, a key factor in its rate decisions, has been slightly higher than anticipated and could stay that way in the short term because of temporary factors like stronger gasoline prices. Core inflation, which measures underlying inflation by omitting volatile items like gas, has continued to inch upwards.

Governor Stephen Poloz raised rates in July and September in response to an impressive economic run that began in late 2016. The hikes took back the two rate cuts he introduced in 2015 to help cushion, and stimulate, the economy from the collapse in oil prices.

From here, the central bank must assess how to proceed with the interest rates while taking into consideration that Canadian households have amassed high levels of debt and the presence of still-hot housing markets in areas like Toronto and Vancouver.

Last month, the BoC flagged the steady climb of household debt and these real estate markets as the financial system’s top vulnerabilities.

The central bank’s statement Wednesday said recent economic indicators have been in line with its October forecast, which projected a moderation following the country’s exceptional growth in the first half of 2017.

The document contained a few differences compared with the statement that accompanied its last rate announcement in October.

This time, the central bank once again noted the unknowns over the future of trade policy, however, it did not specifically mention the ongoing renegotiation of the North American Free Trade Agreement.

Read: U.S. economists focus on NAFTA risk, not tax cut benefits

In a research note, CIBC Capital Markets chief economist Avery Shenfeld said the expected announcement didn’t come with a “clarion call” on when the overnight rate target would rise again.

“Further rate hikes are still coming, but even if they move ahead of our April target, that needn’t mean that we’ll see more than 50 basis points in total next year, given the central bank’s emphasis on being cautious on that front,” he wrote.

Economists will watch the upcoming numbers on October GDP and December employment in order to forecast when the next hike comes, Shenfeld said.

Read: Is Canada at risk of recession in 2018?

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