Latest interest rate rise shows economic and business optimism
On July 11th, the Bank of Canada (BoC) raised its key interest rate by 25 basis points and released their quarterly Monetary Policy Report. This is the second increase in 2018 after the January rate hike.
The decision to raise Canada’s key interest rate is backed by solid economic growth and inflation remaining higher than BoC’s 2% target (annual inflation rate in May 2018 was 2.2%). Canadian average wages continue to grow, as the labour market remains tight. The BoC also cited widespread optimism towards the economy from businesses that believe it will be harder to supply the demand they face without further investment.
The decision to raise Canada’s key interest rate 25 basis points is backed by stronger economic growth and inflation remaining higher than BoC’s 2% target.
The risk of a rising loonie have eased since January 2018 given projections of U.S. economic growth. The spread between interest rates in Canada and the U.S. is a major driver of the loonie’s value. The U.S. Federal Reserve is expected to continue raising interest rates, at a slightly faster pace than Canada, lowering the probability to see the loonie appreciate against the U.S. dollar.
Despite improvements to the Canadian economy, the BoC issued a cautionary outlook for the remainder of 2018, meaning this could be the last rate hike in 2018. The BoC indicated that concerns over high household debt have eased as household debt has slowed in relation to disposable income and the Canadian housing market is beginning to stabilize. However, the BoC indicated that trade uncertainty and global trade tensions remain the most significant risks to the Canadian and global economies.
Higher interest rates are going to raise farm expenses for operations that have a significant portion of their debt under a variable rate. Interest rates remain historically low, and it is still possible to insure against future rates hikes by locking in interest rates. While we cannot rule out the possibility of another rate increase before the end of the year, economic uncertainty looms and it may prove difficult for the BoC to go ahead with another hike in 2018. There is no single right answer when it comes to interest rates, do what’s best for your operation.
Leigh joined FCC in 2015 as a Senior Agricultural Economist, specializing in monitoring and analyzing FCC’s portfolio, industry health, and providing industry risk analysis. Prior to FCC, he worked in the policy branch of the Saskatchewan Ministry of Agriculture. He holds a Master of Agricultural Economics degree from the University of Saskatchewan.