DLC’s Cooper on BoC’s rate hike

Says that the BoC’s decision was driven by various compelling factors

DLC’s Cooper on BoC’s rate hike
In her newest post on the Dominion Lending Centres’ online portal, DLC chief economist Dr. Sherry Cooper stated that the Bank of Canada’s decision to raise the target overnight rate to 1.0 per cent was driven by several compelling factors that the finance system could have done little about.

The September 6 increase made “it two hikes in a row following seven years of increasing monetary stimulus.”

“The outsized 4.5% growth in GDP in the second quarter precipitated this action, despite two offsetting factors: the recent surge in the Canadian dollar, up more than 8% in the past three months, to over 81 cents U.S.; and the continued below-target rate of inflation,” Cooper explained.

“Today’s monetary tightening comes at the same time that Federal Reserve officials are suggesting that another rate hike in the U.S. next week is unwarranted–adding further upward pressure on the loonie. The economic and political uncertainty in the U.S. has put considerable downward pressure on U.S. bond yields, while in Canada, interest rates are rising,” she stated.

With Canada’s economic performance “dramatically” outstripping that of the U.S., the twin hammer blows inflicted by Hurricanes Harvey and Irma will only serve to exacerbate the gap, especially since Canadian economic growth is becoming “more broadly based and self-sustaining,” according to the BoC.

However, while “solid employment and income growth” along with business investment and export growth have contributed to Q2 2017’s GDP, Cooper stated that “the housing sector has slowed in some markets–particularly around the GTA–in response to recent changes in tax and housing regulations in Ontario.”

And while “this is a change welcomed by the Bank and government authorities concerned about the continued rise in household debt,” Cooper cautioned that “tighter monetary policy portends further increases in mortgage and other lending rates.”

Cooper added that it would be premature to consider the current climate as the new normal, since “questions remain regarding the potential growth of the economy, which was earlier estimated by the Bank’s economists to be about 1.7%.”

“While the economy is closer to full employment than earlier forecasted, the Bank believes there remains excess capacity in the jobs market. This statement possibly suggests that the economy can grow at a faster pace than the Bank initially thought without triggering inflation.”

Most importantly, Cooper stressed the BoC’s assertion that “the path of further policy decisions is not predetermined but will be dependent on incoming economic and financial data.”

“This cautionary note is consistent with the ‘significant geopolitical risks and uncertainties around international trade and fiscal policies.’”

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