Bank of Canada keeps interest rate at 1.25%, but economists predict hike in July

The Bank of Canada made its fourth interest rate announcement of 2018 on Wednesday, May 30 at 10 am. Adrian Wyld/CP

The Bank of Canada (BoC) said on Wednesday it will maintain its benchmark rate at 1.25 per cent, but the tone of the central bank’s statement suggests a hike is likely in July.

After lifting rates from 1 per cent to 1.25 per cent in January, the bank has held back through three consecutive rate announcements in March, April and May. But BoC watchers believe central bank governor Stephen Poloz is likely gearing up for another hike at the bank’s next monetary policy rendezvous on July 11.

“The tone of the statement was more hawkish than expected, with the concluding paragraph dropping two strong hints that a July hike is on the table,” BMO Capital Markets economist Benjamin Reitzes wrote in a note to clients shortly after the announcement.

CIBC’s Royce Mendes and TD’s Brian DePratto also said the central bank’s wording suggests a July rate hike.

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However, economists disagreed on how many more interest rate increases might be in the cards this year. BMO is forecasting hikes in July and October, while CIBC and TD expect a July increase to the last one for 2018.

All of Canada’s big banks expect the BoC to keep moving rates by a quarter of a percentage point at a time.

The central bank noted that the Canadian economy was a little stronger than expected in the first three months of the year, thanks in part to exports of goods that have been more robust than forecast. Data on imports of machinery and equipment have also suggested a continued recovery in investment.

READ MORE: Canada’s big banks increase mortgage rates, may prompt Bank of Canada hikes

However, the BoC also noted that housing resale activity has remained soft as the market adjusts to new mortgage rules and higher interest rates. On the other hand, solid labour income growth supports the expectation that activity will pick up, the bank added.

The BoC said global economic activity remains broadly on track but added that ongoing uncertainty about trade policies is dampening global business investment, while stresses are developing in some emerging market economies.

READ MORE: ‘Companies are reluctant to invest’ as questions swirl around NAFTA, pipelines: Poloz

The bank said that recent developments have reinforced its view that higher interest rates will be warranted to keep inflation near its target, but that it will take a gradual approach and be guided by the economic data.

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— With files from the Canadian Press

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