Monday June 11, 2018 – Interest Rates

On May 30, 2018 the Bank Of Canada opted to maintain its Benchmark Rate at 1.25%. Following the decision many economists predicted that we should expect further increases in interest rates in the coming months.

Will this be the case?

The Bank of Canada raises interest rates for one predominant reason: to keep a lid on inflation. The generally accepted rule on the Canadian economy is that as the economy of the United States heats up ours is soon to follow.

As massive tax cuts in the U.S. has driven aggressive U.S. economic growth, Canada’s economy too has been humming along. Indeed, London and surrounding area has experienced siginificant job growth and lower unemployment as the U.S. economic expansion has widened. Thus the worry on interest rates has been that Bank of Canada Governor Stephen Poloz will raise rates in order to stem off inflation.

However, very few predicted that U.S. President Donald Trump would impoose the tariffs against Canadian steel and aluminum, a move that is surely to decrease exports. Further, Prime Minister Justin Trudeau’s promise to retaliate will only further questions about future Canadian economic growth.

All of this creates uncertainty, and markets to not like uncertainty. Poloz might be tempted to maintain the Benchmark rate while he waits to see the end result of the current trade rift between the U.S. and Canada.

Whether or not Poloz decides to raise interest rates will come down to whether or not he sees the current tension over trade with the U.S. to be a long term reality or a short term blip will be the deciding factor in the decision to raise or maintain Canada’s benchmark rate.