Bank of Canada holds rates despite rising inflation

Author: Portfolio Specialist Group

April 23, 2018

AGF Weekly Perspectives

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

Bank of Canada holds rates steady

  • The Bank of Canada held their key policy rate unchanged at 1.25% as widely expected, with comments signaling a slow and steady path towards higher rates in the coming months.
  • Governor Stephen Poloz mentioned “some progress” on wages and inflation, though also pointed to weakness in housing and exports causing slower economic growth in the first quarter.
  • The central bank’s Monetary Policy Report showed GDP expectations were lowered to 2.0% for 2018, from 2.2%, while 2019 was upgraded to 2.1%, from 1.6%. 2020 projections were also introduced at 1.8%. The Bank of Canada’s inflation forecast for 2018 was also moved 0.4% higher to 2.3% and unchanged in the following periods.

Canadian inflation trends higher

  • Canadian inflation rose to 2.3% annualized, with a 0.3% gain in March, to reach three-and-a-half year highs after recording successive gains through the first quarter. The average of the Bank of Canada’s core measures was 2.0% in March and in line with the long-term target.
  • Higher energy costs have been a primary contributor to price pressures, with gasoline prices rising 2.9% in March and 17.1% from a year ago. Clothing has been relatively flat year over year and food prices are slightly higher.
  • Also reported, Canadian retail sales rose 0.4% in February with a solid 1.4% gain in auto sales. Outside of the vehicles category, sales were flat on the month. At 3.5% annualized growth, retail sales are trending below 2017 and 2016 averages.

U.S. economic data shows broad improvement in March

  • U.S. retail sales recorded a 0.6% gain in March to end three consecutive months of deceleration. Spending on vehicles, health and personal care and electronics more than offset declines in clothing, gas station receipts and sporting goods.
  • Also reported, U.S. housing starts rose 1.9% in March, rounding out the strongest quarter of annualized units since 2007 and trending 10.9% higher year over year. The gains were entirely supported by multi-family units, as single-family starts declined in the month.
  • U.S. industrial production advanced 0.5% in March and improved output to a 4.3% annualized pace as capacity utilization reached a three-year high.

Other economic news

  • China’s economy grew at a 6.8% annualized pace in the first quarter of 2018, with personal spending making up a large majority of the gain. Retail sales are up 10.1% annualized in March after a surge in online sales. Industrial production was also strong in March with 6.0% annualized growth.
  • The U.K. labour market continues to strengthen despite Brexit uncertainty, with the unemployment rate reaching 4.2% in the three months to February, the lowest level since 1975. Wage growth also rose at the fastest pace in three years, reaching 2.8%. Inflation remained elevated at 2.5% year over year in March, though is down from 3.1% only four months ago.

What’s to come

U.S. first-quarter GDP and the ECB meeting

  • U.S. economic growth is expected to ease in the first quarter with GDP data released on Friday. The U.S. will also report housing sales data during the week. In Europe, the ECB is expected to hold rates unchanged, though accompanying statements will be closely examined for hints of future tightening.

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