The Bank of Canada raised interest rates on Wednesday, as expected, citing more confidence in its outlook and a need to look through soft inflation, but said future moves will depend on data amid uncertainty and financial system vulnerabilities.
In a decision that emphasized the lag between a rate hike and future inflation, the central bank raised its official interest rate by a quarter of a percentage point to 0.75 per cent but signaled it did not want to commit to a predetermined path of more hikes.
“Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities,” the bank said a statement announcing the decision.
Acknowledging the contradiction in raising rates amid low inflation, the bank said it will continue to analyze short-term price fluctuations “to determine the extent to which it remains appropriate to look through them,” and noted temporary factors like electricity rebates that have kept a lid on prices.
It said it expects inflation to return to close to 2 per cent by the middle of 2018 but said global structural factors could be contributing to low inflation in Canada.
The bank boosted its growth forecasts for 2017 and 2018 but trimmed it for 2019, and projected the output gap to close around the end of 2017, earlier than anticipated in April. It expects annual GDP growth of 2.8 per cent in 2017 and 2.0 per cent in 2018, up from 2.6 per cent and 1.9 per cent, respectively, forecast three months ago.
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