A stronger-than-expected first half of the year prompts us to upgrade our Canadian GDP growth forecast for 2017 to 2.9%. Solid growth is being complemented by a healthy labour market, the latter creating jobs in numbers not seen in seven years. That, coupled with the housing wealth effect means consumer credit growth is surging, thanks, in part, to home equity lines of credit. We have also raised our call for 2018 growth from 2.0% to 2.5% to reflect provincial fiscal stimulus in British Columbia but also in Ontario and Quebec ahead of elections in the latter two provinces. The improving outlook and growing financial stability risks associated with housing and household debt arguably take precedence over the problem of low inflation, and, hence, warrant tighter monetary policy from the Bank of Canada.
In light of the slightly more bullish call on Canada, we now expect the Bank of Canada’s overnight rate to end 2018 at 1.75%, 25 basis points higher than in our previous forecasts. As such, we are a bit more optimistic about the Canadian dollar, now expecting USD/CAD to trade in the 1.20-1.30 range over the next 12 months.
We have also raised our targets for the euro to reflect an improved economic outlook on the old continent. So, the trade-weighted U.S. dollar is likely to remain under pressure for a while longer. But the greenback could find renewed strength in 2018 if, as we expect, the Fed surprises markets with a couple of interest rate hikes next year.