Bank of Canada to hike rates in July, despite trade woes
The central bank has raised rates three times since July 2017, and on May 30 said higher interest rates were warranted, dropping more cautious language about additional monetary stimulus being needed.
Consumer prices have edged past the midpoint of the Bank of Canada's 1 percent to 3 percent inflation target range, and even wage inflation, which had been slow to pick up after a 2015 slump, has begun to strengthen amid job gains.
At the same time, tit-for-tat tariffs between Canada and the United States could threaten economic growth, particularly if the Trump administration goes ahead with a threat to impose tariffs on auto imports.
"The July decision is about rising trade tensions versus strong domestic momentum," said Sebastien Lavoie, chief economist at Laurentian Bank.
"If the BoC continues with its current approach of assuming that current trade arrangements will be maintained, the threat of auto tariffs and further trade tensions between the U.S. and China are unlikely to play a major role in the July 11th decision," he added.
The Bank of Canada will most likely raise rates to 1.50 percent, according to 19 of 25 economists surveyed by Reuters July 4-6.
Only six analysts expected the central bank to keep rates on hold next week. Financial markets are placing odds at about 64 percent for an increase.
A majority of economists expect the bank to be done for the year after a July hike, but eight of 20 believe policymakers will hike again, taking rates to 1.75 percent before the end of 2018.
"We expect a rise in July 2018 and, after that, in January 2019 and in July 2019," said Francis Genereux, senior economist at Desjardins Group.
Asked what effect protectionist U.S. trade policies would have on the Canadian economy, only a minority of analysts polled said they saw a significant near-term risk. But all said they pose a significant risk in the long term if they continue.
"The recent Canadian dollar depreciation is currently acting as a partial buffer against the American tariffs," Scotiabank economists wrote in an email.
While Canada's dollar is expected to climb over the coming year, currency strategists in a separate Reuters poll were less bullish than they were a month ago as escalating trade uncertainty competes with expected Bank of Canada interest rate hikes.
U.S. tariffs on steel and aluminum imports from Canada went into effect on June 1, and Canada struck back with reciprocal tariffs on C$16.6 billion worth of American goods.
The retaliatory tariffs went into effect on July 1 and largely target U.S. steel and aluminum products, but also food items such as coffee, ketchup and whiskies.
(Polling and additional reporting by Kailash Bathijap; Editing by Jeffrey Benkoe)
By Andrea Hopkins