17 January 2018

The BoC expects economic growth to slow down sharply to 2.2% in 2018 and to 1.6% next year, following a 3% gain of 2017. Such forecasts almost coincide with the October’s predictions.

The recent forecasts reflect the bank’s negative assessment of the business investment and trade, says the statement.

In addition to it, the Bank said that Canada’s economy is benefitting from higher oil prices, which exceed $60 (U.S.) per barrel today. However, this benefit is restrained by the growing spread between Canadian and world crude prices.

In Bank’s opinion, business investment and exports will be the main drivers of economic growth, and not consumers or home construction. The reason for such a change is the implementation of tighter mortgage rules in January and higher interest rates.

Here are some of the reactions to the rate hike from Canadian analysts and economists:

David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, calls thie Bank’s move “a classic dovish hike.”

“In my opinion, the most important thing is that a marketplace that predicted three more hikes after this one, now need to reconsider their forecasts. It’s more like two increases now, as based on what we saw in the Banks statement, I can call it a classic dovish hike. Although the Bank raised the rate this time, it definitely didn’t give any support to those who predict three more increases this year. I believe, such a tone can mean they could be done for the year.”

Douglas Porter, BMO Chief Economist

“A new possibility appeared – NAFTA talks may stay put until the mid-year Mexican election. If it happens, the BoC could get on with its business sooner.”

It’s been three rate hikes since last summer, and the Bank was pointing to the uncertainty over NAFTA affecting the economic outlook. Frances Donald, senior economist at Manulife Asset Management, provides a commentary, including a prediction of only one more rate hike in 2018.

Frances Donald, senior economist, Manulife Asset Management

“We can’t predict the outcome of NAFTA and even the time when it happens. There are Mexican elections in July and mid-term elections in the U.S. in November. It may take a year or longer to understand the real influence of NAFTA on the economy. But look what they’re hinting at. In my opinion, it’s a dovish sign that they are paying attention to these uncertainties.”

Craig Alexander, Conference Board of Canada Senior Vice-President and Chief Economist

“Canada’s strong economic results last year guaranteed stricter monetary policy. Nevertheless, the expected slower economic growth should limit future rate increases. Until NAFTA talks end, the BoC may show two more rate hikes in 2018.”

Avery Shenfeld, CIBC Capital Markets Chief Economist

“Today’s increase was based on the past data, but the central bank hints that the future may be not so bright. We agree that higher rates will be necessary in time, although not at such a fact pace, as markets started thinking”.

Rob McLister, founder of RateSpy

“The hike doesn’t provide a strong impact on mortgage holders. In case of an average mortgage for $200,000, it’s almost a $25 increase of monthly payments. For variable mortgages, the prime rate will go up to 3.45% – the level we haven’t seen in 9 years. Young borrowers getting their first mortgage or renewing the existing one will face the rates they are not used to.”

Next Bank of Canada rate announcement is on March 7, 2018.