Bank Of Canada Hikes Rates To 1.25%; Gold Priced In CAD Jumps

BoC rate decision

(Kitco News) – The Bank of Canada raised its key interest rate to 1.25% on Wednesday, hiking rates for the third time since last summer.

Gold priced in Canadian dollars jumped up on the news, last trading at C$1,668.18 an ounce, up 0.24% on the day, according to Kitco’s Gold-Currency charts.

The decision was widely expected, as market odds projecting a rate hike were close to 90% prior to the announcement.

“Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook,” the Bank of Canada said in the press release.

The central bank is expecting real GDP growth to slow to 2.2% this year and then to 1.6% in 2019, after a projected 3% growth in 2017.

The BoC added that it will remain “cautious” in the future and will rely heavily on “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 BoC is the first major central bank to hike rates this week.

But, Wednesday’s hike, might not translate into a more aggressive central bank this year, according to analysts. There are still a lot of concerns worrying the BoC, including uncertainty around NAFTA negotiations, rising household debt levels and tighter stress tests for uninsured mortgages introduced this year.

“We had thought that the stagnation of the economy net-net since the two rate hikes in Q3 (judging from the monthly GDP readings), signs of softness in house prices in Toronto and Vancouver areas, coupled with the strength of the Canadian dollar and NAFTA uncertainties would have removed any sense of urgency from the central bank,” analysts at Brown Brothers Harriman wrote in a note to clients ahead of the BOC’s statement.

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CIBC Capital Markets chief economist Avery Shenfeld called the central bank’s hike a “rear mirror move,” noting that the BoC recognizes that “the view out the front window isn’t quite as sunny.”

“Overall, this was a dovish statement relative to the minimum degree of optimism needed to justify a rate hike today,” Shenfeld wrote.

“Canada did so well in 2017 that it left little slack in labor markets or capacity in its wake . . . and we share the Bank of Canada’s view that higher rates will be needed over time. But perhaps not as fast and furious as the market was starting to think. The Bank’s statement put NAFTA uncertainties right up front in their statement, and also explained that ‘monetary accommodation’ (ie. rates at stimulative levels) will be needed . . . reasserting the need to be cautious in how fast they hike ahead,” the chief economist added.

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