On Oct 24, Bank of Canada (BoC) raised its key interest rate by a quarter point to 1.75%, marking its third rate hike this year and fifth from 2017, when it started to raise rates. This rate hike was already expected and priced in by the markets but the hawkish tone of the central bank was a surprise to many. More rate hikes are expected within a short span of time with central bank pegging the neutral rate in the range of 2.5%-3.5%. Gold price in Canadian dollars ended the day 0.6% down (see: all the Canadian Equity ETFs).
“The Canadian economy continues to operate close to its potential and the composition of growth is more balanced” per the bank statement. The rates had not gone beyond the 1.5% mark since December 2008 when the banks had made a three quarter point cut to the rate from 2.25% to counter the financial crisis.
The economy is forecast to grow at the rate of 2.1% for this and next year but slow down to 1.9% in 2020. BoC highlighted that it is keeping an eye on the how the increase in rates are effecting rising household debt and indicated that trade war between Beijing and Washington will weigh on global growth and commodity prices.
This happens to be the apex’s bank first policy decision since Canada agreed with the United States and Mexico earlier this month on an updated North American free trade deal. “The new U.S.-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment,” the bank said in a statement on Oct 24 (read: United States-Mexico-Canada Deal Puts These ETFs in Focus).
Post USMCA, BoC expects trade tensions between the two countries to mellow a bit. In July, the business investments were expected to come down by 1.4% till the end of 2020 due to the counter moves made by both countries on each other’s goods. However, estimates have been revised to 0.7% now. Exports have also been benefited by the new agreement as they are expected to go down by 0.3% in comparison to previous prediction of 0.7%.
