Canada's central bank increased its key lending rate 0.25 percentage points to 1.75 percent on Wednesday, saying a continental trade deal reached with the United States and Mexico has lifted uncertainty that was weighing on the economy.
The Bank of Canada's fifth rate hike in the past year comes as projections for exports and business investment were revised up, reflecting the new US-Mexico-Canada (USMCA) trade pact announced on October 1. The increase was widely expected, but still worries many debt-laden Canadians, with nearly one in five telling CBC Research it will make it harder for them to keep up with loan and mortgage payments.
Nearly two-thirds of 1,000 Canadians surveyed this month said an increase of more than Can$100 (US$77) in their monthly debt payments would force them to change their spending habits just to make ends meet. In a statement, the central bank acknowledged those concerns, saying it would "continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt" in deciding future rate increases.
It also pointed to an easing of inflation last month to 2.2 percent after a summer spike in airfares was reversed. It noted that the impact of past increases in gasoline prices and minimum wages should also "fade in early 2019."
CIBC Economics analyst Avery Shenfeld said the rate increase was "reasonable" despite some "not spectacular" economic data of late. "But the tone was more hawkish than we expected, dropping the reference to 'gradual' for hikes ahead," he commented, adding that markets will see this as "leaving the door open for two in a row, meaning a hike in December." "We're not as optimistic on the economy's ability to weather that dose of tightening," he concluded.
The central bank said it now expects inflation to remain close to its 2.0 percent target through the end of 2020, "consistent with an economy that is operating at capacity." The global economic outlook, it said, "remains solid."
The economy of the United States - Canada's largest trading partner and neighbor - "is especially robust" but is expected to "moderate over the projection horizon."