Bank of Canada hikes rates despite trade concerns

Author: Portfolio Specialist Group

July 16, 2018

AGF Weekly Perspectives

“A recap of last week’s top economic news and what’s to come”

Bank of Canada hikes rates

  • The Bank of Canada (BoC) delivered a widely expected 25 basis points interest rate hike with a tone that included both hawkish and dovish elements. The fourth such hike in the past year brings the central bank’s policy rate to 1.5%.
  • The BoC noted stabilization within the housing market and that business investment exports have improved. However, protectionism appears to be a key concern and is “judged to be larger, given the mounting trade tensions”.
  • The BoC appears committed to its normalization path despite trade risks, stating “the Bank cannot make policy on the basis of hypothetical scenarios”.

U.S. inflation moves higher

  • U.S. inflation rose 0.1% in June to an annualized pace of 2.9%, a six-and-a-half year high. Despite rising 12% in the past year, energy prices pulled back slightly, as did clothing costs hotel rates.
  • Core inflation rose 0.2%, lifting annualized growth to 2.3% and matching decade-highs.
  • The effects of tariffs are beginning to show with laundry equipment prices up 20% since duties on washing machines came into effect. New vehicle prices also rose strongly for the second straight month, reflecting steel and aluminum tariffs.

Canadian housing starts spike

  • Canadian housing starts spiked 28% in June and lifted the 12-month average to the highest level since August 2008.
  • Urban multi-family starts drove the gain with a 45% surge, particularly in Ontario, which offset a small decline in single-detached starts. In total, six of 10 provinces reported increased activity.
  • In a separate release, building permits rose 4.7% in May with a strong advance in residential plans.

Other economic news

  • The U.S. administration proposed a 10% duty on an additional US$200 billion worth of Chinese imports. The newly introduced tariffs could take effect as early as September, unless concessions are made in the public hearing and comment period, which will take place in the coming weeks.
  • Eurozone industrial production rose a strong 1.3% in May, the largest monthly increase since November 2017, after wavering in prior months. Production of durable and non-durable consumer goods led the gain.

What’s to come

Global inflation update

  • Several regions including Canada, Japan and the eurozone will report June inflation data during the week. In the U.S., housing starts and building permits will be released on Wednesday.

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