Bank of Canada Raises Rates But Cautions Stimulus Still Needed

The Bank of Canada pushed forward with its third quarter-point interest rate since July, while cautioning it’s in no rush to return borrowing costs to more normal levels as uncertainty around Nafta talks cloud the outlook.

Policy makers led by Governor Stephen Poloz increased the benchmark overnight rate to 1.25 percent, bringing it to the highest since the global recession. The move is a nod to a red-hot economy running up against capacity with a jobless rate at the lowest in more than four decades.

At the same time, central bank officials repeated their dovish language about moving ahead cautiously and warned they expect the economy will require continued stimulus to remain at capacity. The Canadian dollar and bond yields slipped while stocks rallied.

“While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target,” the Bank of Canada said Wednesday in a statement from Ottawa. “Governing Council will remain cautious in considering future policy adjustments.”

Key Takeaways

  •  In raising rates, the Bank of Canada points to strong data, inflation at target and economy at capacity — and says more hikes are expected.
  • At the same time, it retains cautious language about future adjustments and adds new language around the need for continued monetary accommodation
  • The central bank cites growing risks around North American Free Trade Agreement negotiations, which are “weighing increasingly” on Canada’s economic outlook