Bank of Canada sets 2019 interest rate target at 2%

Story highlights The Bank of Canada says its 2% is a preview of what’s to come.

But don’t worry, that 2% rate is still 0.25 percentage points above the BOOC’s target range of 1% to 3%.

If you’re looking to borrow and maybe even need some extra cash for your budget or to carry cash on a rainy day, now’s the time to act.

After dealing with a two-year period of low interest rates in the US and the UK, it’s Canada’s turn to see some rates fluctuate upward. At a press conference in Ottawa on Wednesday, the Bank of Canada announced that its next hike will come after it publishes its Monetary Policy Report (MPR) in January.

Speaking in front of reporters, Bank of Canada Governor Stephen Poloz said the bank was “reasonably confident” in its projection of 3% GDP growth for Canada in the third quarter. This would be a significant increase from the 2.2% gain the country experienced in the second quarter. The shift puts the Bank of Canada a full percentage point above its target range for interest rates of 1% to 3%, Poloz said.

Meanwhile, the bank’s decision to raise rates suggests it’s concerned that the growth is due in part to unsustainable economic activity. Specifically, Poloz pointed to employment gains in the manufacturing and construction sectors — and not necessarily the job market as a whole. “The drivers are undoubtedly export and business investment,” Poloz said. “There’s some crossover in terms of those measures, but it’s still much more export and business investment driven in Canada than household consumption, perhaps. . . The housing market is functioning normally. It’s not a big problem.”

Poloz also acknowledged that some respondents to the bank’s monetary policy survey reported rising financial vulnerabilities in Canada. Specifically, there has been a large rise in the proportion of those who expect to have to deleverage their balance sheets during the next two years.

So what is an MPR? It’s a series of meetings and reports that the Bank of Canada conducts every six months to assess the current state of the Canadian economy and make its next interest rate decisions. The next meeting of the Bank of Canada is expected in January.

So, will the Bank of Canada raise rates further to push inflation up to its 2% target? Or will it decide to stick to 1% interest rates at least until the end of 2019? There are a few reasons why it may leave rates the same, and we’ll be watching to see what they are.

First, consider that Poloz said the Bank of Canada won’t be able to revise its economy in the next MPR “unless [it] has a good reason to do so.” Then, in 2019, Canada heads into its next election year, where “the Canadian dollar has historically not held up well,” Poloz said. A strengthening dollar indicates a strengthening economy, but it has historically meaningfully damaged economies in the US, because of Canada’s trade links with the US.

Next, keep in mind that in July, Poloz said raising interest rates to the 2% range from the current 1% range to 2% is a “benchmark interest rate, not a neutral level of interest.” As such, the decision to raise interest rates, or not, is more tied to how the economy performs than it is to whether the Bank of Canada decides to keep interest rates where they are.

So the numbers will ultimately weigh heavily on which direction the Bank of Canada decides to go. If you’re looking to borrow and maybe even need some extra cash for your budget or to carry cash on a rainy day, now’s the time to act.

By Elizabeth Flock

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