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The Bank of Canada left its key interest rate unchanged today at 1.25% as expected. James Smith, Economist at ING, points out that the BoC used a more optimistic language in its statement suggests tightening may not be far away.

Key Quotes:

“The Bank of Canada kept interest rates on hold, however the tone of its statement was notably less cautious than before. The Bank said that “higher interest rates will be warranted to keep inflation near target”. It seems the main reason for keeping rates unchanged at this meeting is the ongoing uncertainty surrounding ‘trade policy’, implicitly referring to the North American Free Trade Agreement (Nafta) and US tariff developments.”

“Time is running short for Nafta. The exemption on US steel and aluminium tariffs given to Canada and Mexico is due to end on Friday. Meanwhile, the clock is ticking on the ability of a Republican congress to sign any deal ahead of the November US mid-terms and ahead of the possible expiry of the Trade Promotion Authority.”

“We still think that a deal can be reached, particularly given the time pressures on all three fronts to achieve a quick “win-win-win” outcome. Assuming this is the case and activity data continues to perform better, we still expect the Bank of Canada to hike twice in the second half of the year, potentially starting in July.”