The interest rate was maintained at 1.5% by the Central Bank, an indication that the NAFTA talks could influence the pace of increases in the future. On Wednesday, the Bank of Canada kept its standard interest rate stable at 1.5% as there is a possibility that the North American Free Trade Agreement could have a significant impact on the increases of future rates.
In a short policy statement, the central bank opined that higher interest rates would be required to ensure inflation is kept close to its 2% target. The central bank also confirmed that it would continue to engage a systematic style to increase rates, backed with incoming data and the reaction of the economy to higher rates.
In its policy statement, the bank also confirmed that it is also ensuring the monitoring of the NAFTA discussions and other trade policy expansions, as well as their influence on the outlook of the inflation. However, the central bank of Canada fixes interest rates to maintain and achieve 2% inflation over the long term.
In the words of Josh Nye, an economist with the Royal Bank, he said that the statement strengthened the expectations of analyst that the Bank of Canada will increase the key interest by a quarter-percentage point at a policy declaration in the latter part of October. He also said that in the case of an unforeseen weakening in business reaction or the disbanding of NAFTA, the increase in the rate by October remains unchanged.
However, the interest-rate decision was released on Wednesday, the same day that United States and Canada negotiators were supposed to discuss the NAFTA negotiations in Washington after they avoided a deadline imposed by the United States on Friday. During the early part of the week, Mexico and the United States of America agreed on their trilateral deal, and this has placed Canada under severe pressure to conform to the conditions given by the United States or be eliminated from the accord.
According to a study by the Bank for International Settlements, NAFTA is considered to be important for Canada, as a significant part of its exports are shipped to the United States, Canada will be the biggest loser if the deal is suspended. According to the data offered by Statistics Canada on Wednesday, the exports of Canada increased in July thereby reducing the trade deficit of the nation with the other countries of the world.
In a statement released by the central bank on Wednesday, the Bank of Canada has expressed concerns about the aftermath of the trade deal’s future for more than twelve months. It has been trying to increase interest rates after maintaining them at super-low levels in a bid to ensure the recovery of the economy from the financial disaster and the 2014 reduction in the prices of the global commodity. The business investment in Canada has been affected by the doubt surrounding the trade policy. The central bank also confirmed that increased trade tensions have posed a threat to the global outlook and playing a role in the reduction of some commodity prices when the economy of the United States is performing excellently.
The Bank of Canada asserted that the headline inflation at a rate higher than the anticipated rate at 3% in response to the maintaining the key rate on hold. The central bank suggested that there is an expectation of the inflation moving to its 2% target in the early part of 2019, as the impact of previous increases in the prices of gas disappears. It has also been observed that the instruments of fundamental and core inflation are unchanged around 2%.
According to the Central Bank Governor, Stephen Poloz, he confirmed that the economy of Canada is progressing according to the new prediction which was released in July. Nevertheless, the economic growth is expected to experience slowness in the next few months on additional variations in exports and energy production. The deputy governor of the central bank, Carolyn Wilkins is expected to deliver a speech on Thursday which is anticipated to grow on the outlook of Canada.
The Bank of Canada said the business investment and exports have been increasing for some segments irrespective of the risks involved in trade policy. It is noteworthy that the housing activity is stable after the introduction of strict mortgage-financing regulations and increased interest rates.
According to a Wall Street Journal survey of economists, the Bank of Canada was expected to keep interest rates on hold, as they opined that the doubt surrounding NAFTA and the belief that rate increases should be taken slowly would ensure the shelving of the central bank until October. However, the next arranged decision will be provided on October 24.
Since the mid-2017, the interest rates have been increased four times by the Bank of Canada, with the most recent one in July.
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