Bank of Canada Holds Interest Rates at 1.25 Percent

On Wednesday, the Bank of Canada chose to keep its benchmark interest rate at its current status of 1.25 percent, but gave a word of caution regarding future hikes.

With weakness in the housing market and struggles in export growth due to “competitiveness and uncertainty about trade policies,” the economy had a weaker performance in the first three months of 2018 than the central bank had anticipated.

However, it expects to see stronger numbers in the second half of the year. “The economy is projected to operate slightly above its potential over the next three years, with real GDP growth of about two per cent in both 2018 and 2019, and 1.8 per cent in 2020,” the bank said in a statement.

The bank expects to see the Canadian economy strengthen through the export market as foreign demand increases, along with strong labor income growth.

It also explained that the “transitory impact” of heightened gas prices and minimum wage increases will likely boost inflation this year. It should eventually simmer to the bank’s target of 2 percent.

However, the bank strongly suggested that in order to reach that target, interest rate hikes will be coming down the pike later this year.

“Higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target,” the bank’s statement reads.

After the announcement, the S&P/TSX Composite Index (INDEXTSI:OSPTX) jumped 180.08 points to reach 15,533.98, buoyed by the Bank of Canada’s optimistic growth outlook for the economy.

The index reached a high of 16,412.94 early in January, but dropped precipitously heading into February. It saw a slight uptick in March, but so far in April has been trading around the 15,200 level.

The Bank of Canada’s next scheduled announcement is set for May 30.

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Securities Disclosure: I, Olivia Da Silva, hold no direct investment interest in any company mentioned in this article.