Interest Rates

Bank of Canada keeps interest rates unchanged as NAFTA worries weigh

By: Jessica Mach on September 5, 2018

The Bank of Canada (BoC) is keeping its overnight interest rate at 1.5%, after raising it for the second time this year back in July.

This decision was widely anticipated by experts, who cited ongoing NAFTA negotiations and the uncertainty of the outcome as a big reason to hold off on hiking rates.

In a nutshell, the BoC, Canada’s central bank, is responsible for keeping inflation in check by adjusting its overnight rate based on how the national economy is doing. When the economy is flourishing, the bank hikes rates to discourage consumers from spending recklessly. When the economy is lagging behind, the bank lowers its rate to encourage consumers to spend money.

The BoC hiked its overnight rate twice in 2018, based on Canada’s strong job market and healthy economic growth. 1.5% is the highest that the rate has been since the 2009 recession, when the bank lowered its rates to near zero to boost the economy.

While the economy isn’t doing badly right now, the uncertainty of the NAFTA negotiations — which could have a big impact on Canada’s import and export economy — is enough to make the BoC less confident about hiking too soon. “Canada is still on the outside looking in on a NAFTA deal, has already been hit by U.S. metals tariffs and is facing Donald Trump’s repeated threats of auto tariffs,” said CIBC’s Avery Shenfeld in mid-August.

“None of this will be resolved by Wednesday and may be enough in itself to keep policy makers on hold.”

The BoC also describes wage growth as merely “moderate” and notes that the country’s housing markets — which have been hit with a range of federal, provincial, and municipal regulations in the past year — is “beginning to stabilize.” This gives the BoC less of an incentive to hike right now: if consumers aren’t spending money recklessly, then the BoC doesn’t have to rush to stop them.

That being said, a hike is probably coming before the end of the year — perhaps even as soon as October.

For one, NAFTA negotiations may be wrapped up by then. “Poloz is likely to justify a rate hike next month on the grounds that reduced uncertainty over trade, if a NAFTA deal is wrapped up, has improved the outlook ahead for exports and related capital spending,” Shenfeld wrote last week in a CIBC report.

Inflation has also been growing at a faster pace than expected, the BoC said, moving up to 3% in July. The BoC typically likes to see inflation stay around the sweet spot of 2%.

“Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target,” the bank said in a statement.

The BoC adds that the job market is looking strong. The household-to-debt ratio has also continued to fall, a metric the BoC has raised concerns about in the past.