The Bank of Canada (BOC) raised its benchmark interest rate to 1.5% today, up from the 1.25% where it has sat for the last six months.
In a statement, the BOC said it expects the global economy to grow by about 3.75% this year, and by and 3.5% next year.
“Canada’s economy continues to operate close to its capacity and the composition of growth is shifting,” said the BOC. “Temporary factors are causing volatility in quarterly growth rates: the bank projects a pick-up to 2.8% in the second quarter and a moderation to 1.5% in the third.”
In addition, “household spending is being dampened by higher interest rates and tighter mortgage lending guidelines.”
The BOC said recent data suggest housing markets are “beginning to stabilize” following a “weak” start to 2018.
In addition, business investment is growing “in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors.”
Meanwhile, exports are being buoyed by strong global demand and higher commodity prices. “Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors,” said the BOC.
“The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar. This is contributing to financial stresses in some emerging market economies,” said the BOC. “The possibility of more trade protectionism is the most important threat to global prospects.”
The BOC said it is continuing to monitor the economy’s adjustment to higher interest rates and the evolution of capacity and wage pressures, as well as the response of companies and consumers to trade actions.
Overall, it still expects average growth of close to 2% over 2018-2020.