BNN Bloomberg speaks with PIMCO's Ed Devlin about his take on the Bank of Canada's decision to raise rates amid ongoing economic challenges the country is facing. -Canada trade dispute would figure prominently in the bank's decision-making process for today's rate announcement.
At the same time, household spending will represent a smaller and smaller share of overall growth due to the dampening effects of higher interest rates and stricter mortgage rules, it said. This effect is now judged to be larger, given mounting trade tensions.
The bank says persistent trade uncertainty and Canada's tariff fight with the United States will shave almost 0.7 per cent from economic growth by the end of 2020 - but it predicts the blow to be largely offset by the positive impact of higher oil prices.
The fourth rate increase since July 2017 comes as Canada grapples with the pressures of rising inflation and solid job growth despite an increasingly hostile USA trade policy that could choke off demand from Canada's largest export market.
The Bank said Canada's economy is operating "close to capacity", implying that it expects to see inflation rise in the future.
"I thought this was about as neutral a statement as you possibly can put into the marketplace given that you have hiked rates.We're pretty much in uncharted territory in the sense of we've never been this indebted, rates have never really been this low, and [Poloz] is trying to reverse the ship without turning the ship over".
As expected, the Bank of Canada raised its key lending rate on Wednesday, to 1.5 per cent, the fourth rate hike in roughly the past year. The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack.
Poloz has followed a cautious, data-dependent approach in recent months and he hasn't touched the rate since raising it in January, a move that came after two earlier increases in the second half of 2017.