Bank of Canada to start 2018 with a hike, despite NAFTA risks

FxWirePro: NAFTA remains lingering risks for loonie, crude prospects on the other corner but BoC's monetary policy

TD Canada Trust is the Canadian retail bank of TD Bank Group, the sixth largest bank in North America.

OTTAWA-As was widely expected, the Bank of Canada raised its overnight rate target by 0.25 percent to 1.25 percent on January 17 while sounding a cautious tone as the NAFTA renegotiations risk increases.

The rate increase was widely anticipated, according to a survey of economists by The Wall Street Journal, after Canada's unemployment rate fell to a historically low level of 5.7% and annual inflation rose above the central bank's 2% target in November.

The BoC projects GDP growth of 2.2 percent in 2018 and 1.6 percent in 2019 and for inflation to remain close to the 2 percent target over its projection timeframe going out to 2019.

The bank cited strong employment growth as a contributing factor to stronger-than-anticipated consumption and residential investment.

But while global commodity prices continue to grow, the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices, the bank said. Trade-policy uncertainty is expected to hold back exports by 0.7% by 2020, the bank said.

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The threat of greater protectionism remains the most significant risk to Canada's export-dependent economy, the bank said.

Holders of variable-rate mortgages can expect to see their mortgage rates rise immediately, as happened last summer when the Bank of Canada last hiked interest rates. The bank pointed out that roughly half of Canada's exports to the United States benefited from preferential NAFTA tariffs in 2016. The bank expects exports to get a 1 percent boost by the end of 2019 due to the tax reforms.

The bank also introduced into its projection the potential negative effects of recent USA tax reforms, estimating they will take another 0.5 percent off Canadian investment by the end of next year.

"They would likely turn more dovish, and possibly cut the rate preemptively, if it became very clear that the United States was about to withdraw from NAFTA", he said in an email. Visit MarketWatch.com for more information on this news. Inflation has inched up to near the bank's 2 per cent target and should stay close to that level over the next two years, in spite of "temporary" fluctuations in energy prices in the months ahead, the bank said.

"We share the Bank of Canada's view that higher rates will be needed over time".

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