The Bank of Canada raised its key lending rate by a quarter point to 0.75 percent, responding to what it sees as “above-potential” economic growth. Analysts had expected an increase—the first since September 2010—despite little sign of inflation, which stood at 1.3 percent in May. “The bank acknowledges recent softness in inflation but judges this to be temporary,” it said, adding that it considers it “appropriate to raise its overnight rate target at this time.”
It noted the “solid pace” of growth in the US economy and that “above-potential growth is becoming more widespread in the euro area” despite “elevated geopolitical uncertainty.”
“Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed,” the bank said.
“The very strong growth of the first quarter is expected to moderate over the balance of the year, but remain above potential,” it said.
It said it estimates that Canada’s real GDP growth to hit 2.8 percent this year, and then dip to 2.0 percent in 2018 and 1.6 percent in 2019.
While the bank’s measures of core inflation remain below two percent, it said the weakness was driven by temporary factors, including competition in food prices, electricity rebates in Ontario and changes in automobile prices.
“As the effects of these relative price movements fade and excess capacity is absorbed, the bank expects inflation to return to close to 2 per cent by the middle of 2018.”—AFP