The Bank of Canada maintained its target for the overnight rate at 1 per cent this morning. In the statement accompanying the decision, the Bank noted that the Canadian economy is evolving as expected, with growth slowing in the second half of the year. On inflation, the Bank expects the continued absorption of economic slack to push core inflation higher in subsequent months. Importantly, the Bank concluded its statement by noting that rate increases will be required over time, though it will proceed with caution as it assesses the economy’s sensitivity to higher rates.
Although the Bank of Canada has a bias toward raising rates over the next 12 months, it is currently sidelined by low inflation as well as concerns over how higher interest rates will interact with elevated household debt levels. We anticipate the Bank will remain on hold in early 2018 as it assesses the impact of the forthcoming mortgage stress test, but will look to raise rates one or two times in the second half of next year.
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