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Central bank hikes rate, predicts modest overall impact from US tariff fight

11 July 2018

The fourth rate increase since July 2017 comes as Canada grapples with the pressures of rising inflation and solid job growth despite an increasingly hostile US trade policy that could choke off demand from Canada's largest export market.

The Bank of Canada raised its benchmark interest rate by a quarter percentage point to 1.5 per cent Wednesday, even as the economy faces fallout from widening trade uncertainty.

The Bank of Canada expectedly increased their key interest rate by 25bps to 1.50%, marking the fourth rate hike in the last 12-months, which resulted in the Canadian dollar climbing on the news.

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Governor Stephen Poloz said that while it was not easy for policymakers to set aside "all the talk" about trade, the bank hiked rates amid increasing confidence in its outlook, with Canada's economy firing on all cylinders despite the tensions. The interest charged on this kind of debt typically goes up when the Bank raises its rate. The tariff fight, the bank estimated, will shave almost 0.7% from Canada's economic growth by the end of 2020.

CPI and the Bank's core measures of inflation remain near 2 per cent, consistent with an economy operating close to capacity. Household spending is being dampened by higher interest rates and tighter mortgage lending guidelines.

Economists anticipate several more hikes this year and in 2019.

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The country's inflation rate is expected to rise as high as 2.5% - above the 2% mid-point of the bank's target range - due to temporary factors such as higher gasoline prices.

Canadian government bond prices were mostly lower across a flatter yield curve, with the two-year down 4 cents to yield 1.959 per cent and the 10-year falling 5 cents to yield 2.156 per cent.

The bank, however, noted in its report that despite "healthy" labour market conditions, employment growth and average hours worked have slowed down compared to last year's surge.

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Central bank hikes rate, predicts modest overall impact from US tariff fight