“The Bank of Canada maintained its target overnight rate at 1 1/4%… Global growth remains solid and broad-based. In the United states, new government spending and previously-announced tax cuts are anticipated to boost growth in 2018 and 2019. However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlook… Some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. (Bank of Canada, March 7, 2018)

The Bank of The Canada (BoC) had recently raised its overnight rate in January to 1.25%, so it was no surprise that the Bank held interest rates steady in March. (The overnight rate was recently raised in three increments of 25 basis points on July 12, Sept 6 and January 17.)

The Canadian economy is at or very close to full-employment, which suggests that there is little room for Canadian firms to expand output without putting undue pressure on inflation. Two of the Bank’s three core inflation measures are close to the Bank’s 2% inflation target and all three measures have increased significantly in the past six months.

Absent any new challenges to the Canadian economy, monetary policy will be biased in the direction of higher interest rates. 

However, the Bank will likely hold off raising its overnight rate while it assesses the impact of tighter monetary policy over the past year and the heightened risk to Canadian exports from US trade policy. Although the Bank still maintains a somewhat tightening bias, it has now added growing foreign trade worries into the mix of factors determining their future course of action. As well, the Bank is watching closely the impact on the housing sector of the newly implemented B-20 guidelines on mortgage qualification rules.

While any future tariffs of aluminum and steel are not enough to upset the forward momentum of the Canadian economy, nonetheless NAFTA uncertainty and indeed even the risk of a trade war adds a major level of uncertainty to Canada’s economic outlook.