The Bank of Canada has hiked overnight rates by a +25 bps to +1.25% on the strength of stellar employment data and a pickup in inflation.
It can be viewed as a “dovish” hike as the BoC signalled a “gradual, cautious approach to further rate increases, warning uncertainty tied to the future of the North American Free Trade Agreement is likely to exert a drag on growth.
“Recent data have been strong, inflation is close to target and the economy is operating roughly at capacity,” the Bank of Canada said in a statement. “However, the uncertainty surrounding the future of NAFTA is clouding the economic outlook.”
Underlying economic fundamentals at home and abroad have strengthened, and would otherwise suggest a strong pickup in business investment and exports, the bank said. But trade-policy uncertainty on the North American front would slow growth in both categories, it said.
The CAD whipsawed on currency markets immediately after the BoC hiked its monetary policy rate. The USD/CAD is trading around C$1.2487 from C$1.2413 right before the release of the decision.
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