Bank of Canada\u2019s latest indicator clinches it \u2014 rates are going up<\/a><\/li>\n<\/ul>\nThe central bank released new forecasts that have inflation running hotter than the 2-per-cent target through 2020, suggesting policy makers must soon lift borrowing costs to keep a lid on prices.<\/p>\n
Wages, which had been stagnant, are showing signs of life, a condition that Poloz said last year would have to be met before he would move interest rates significantly higher. Policy makers called domestic consumption \u201crobust,\u201d and they boosted their outlook for the U.S. economy, implying that there is plenty of demand for Canadian goods and services at home and abroad.<\/p>\n
\u201cSome progress has been made on key issues being watched closely by Governing Council, particularly the dynamics of inflation and wage growth,\u201d the Bank of Canada said in statement. \u201cThis progress reinforces Governing Council\u2019s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target.\u201d<\/p>\n
The last part of that quotation provides important context.<\/p>\n
While an interest-rate increase is likely over the next few months, it is equally likely that policy makers will follow it with another long pause. They repeated that they intend to \u201cremain cautious,\u201d citing worries over the sensitivity of highly indebted households to higher interest rates and the inability of exporters to keep pace with their rivals in global markets.<\/p>\n
Exports have underwhelmed, and the central bank is skeptical they will rebound with any amount of vigor. That\u2019s partly because of fears over what U.S. President Donald Trump has in store for the North American Free Trade Agreement, and partly because production costs in Canada are higher than in other countries.<\/p>\n
\u201cCanadian exports will strengthen as foreign demand increases, but not sufficiently to recover the ground lost during recent quarters,\u201d the Bank of Canada said. \u201cBoth exports and investment are being held back by ongoing competitiveness challenges and uncertainty about trade policies.\u201d<\/p>\n
Still, overall, Canada\u2019s economy is in decent shape.<\/p>\n
The Bank of Canada raised the rate at which it thinks the economy can grow without triggering inflation to 1.8 per cent from 1.4 per cent because more Canadians are working and contributing to gross domestic product.<\/p>\n
And the central bank foresees GDP growing faster than that rate in the years ahead. It sees growth of 2 per cent this year and 2.1 per cent in 2019, a significant revision from a previous estimate of 1.6 per cent.<\/p>\n
That means upward pressure on inflation, and policy makers will have little choice but to respond.<\/p>\n
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