Bank of Canada raises overnight rate target to 1 ½ per cent

Stephen Poloz

Bank of Canada Governor Stephen Poloz speaks at a press conference in Ottawa on Thursday

It was the central bank's fourth rate increase in the last 12 months. Overall, the Bank still expects average growth of close to 2 per cent over 2018-2020.

However Poloz said the bank can not make policy on the basis of hypothetical scenarios.

The July projection also incorporates the estimated impact of tariffs on steel and aluminum recently imposed by the United States, as well as the countermeasures enacted by Canada.

"At a quarter point it's not going to change a lot right now, but the Bank of Canada does anticipate to have to continue to raise rates in the future to keep inflation in check, so that's something to be mindful of", said Philip Herner, financial advisor with Assante Capital Management Ltd.

It was reasonable to think at the beginning of the year that the unknowns surrounding NAFTA talks could pause business investment and lead to a decline in activity, he said.

The Bank of Canada also has its eye on how widening global trade disputes, including an intensifying battle between the US and China, will affect the world's economy.

The Bank of Canada is also releasing its quarterly update of projections, which predicts slightly stronger growth in both 2019 and 2020, compared with its outlook in April.

In a statement, the BOC said it expects the global economy to grow by about 3.75% this year, and by and 3.5% next year.

It means consumers with variable rate mortgages or upcoming mortgage renewals will have to pay more.

"The Bank maintained a cautious tone while highlighting its data dependency, that said, this was not the "dovish" hike many, including ourselves, expected". The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack.

The country's inflation rate is expected to rise as high as 2.5 per cent - above the two per cent mid-point of the bank's target range - due to temporary factors such as higher gasoline prices.

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