Bank of Canada raises interest rates on the back of strong economic performance

Following 2017’s strong economic performance, the Bank of Canada is likely to kick off the year by hiking interest rates to 1.25% today.

The expected hike will be Canada’s third in a row, as the country continues to recover from 2015’s collapse in oil prices. Canada’s economy likely grew by some 3% last year—its strongest showing in six years—while unemployment is currently the lowest it has been in forty years. With inflation running close to the targeted 2%, Canada’s economic outlook for 2018 is rosy.

That being said, Canadian lawmakers are becoming increasingly concerned that Donald Trump will withdraw the US from NAFTA, should negotiations stall. With over 75% of exports going to its southern neighbour, the Canadian economy would be wounded if Washington scrapped the deal.

As such, expect Canada’s approach to monetary policy in 2018 to depend, at least in part, on NAFTA’s survival. If a breakthrough is made, interest rates could be hiked up to 1.75% by the end of the year. However, if the trade agreement perishes, the Bank of Canada may hold off on any more increases.

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