The
Bank of Canada announced this morning that it is raising its target for
the overnight rate by 25 basis points to 0.75 per cent. In the press
release accompanying the decision, the Bank noted that Canada's economy
has been robust and a significant amount of economic slack has been
absorbed. While inflation data has been soft, the Bank expects that this
is temporary and that inflation will return to its 2 per cent target by
mid-2018.
The motivation for today's rate increase seems primarily to be that the
Bank feels that the stimulus it injected into the Canadian economy in
2015 through two rate cuts is no longer required given a recent trend of
strong economic and employment growth. If that is the case, a further
25 basis point increase before the end of the year will likely follow.
After that, the pace of rate increases relies heavily on the trend in
Canadian inflation, which to date has been well below the Bank's 2 per
cent target. If that trend does not reverse by early next year, the Bank
may decide to stop at a 1 per cent overnight rate until higher
inflation emerges.
As bond markets reprice rate expectations, Canadian mortgage
rates have returned to levels observed at the beginning of the year. We
expect that mortgage rates will rise further in the second half of
2017, finishing near 3 per cent for a five-year fixed rate.