Investing.com – The Bank of Canada (BoC) decided to keep its benchmark interest rate unchanged on Wednesday, while continuing to observe developments in the renegotiation between the U.S. and Canada of the North American Free Trade Agreement.
As expected, the BoC said it was holding its overnight cash rate steady at 1.50%.
The policy statement noted that recent data has been positive despite the fact that “uncertainty about trade policies continues to weigh on businesses”.
The BoC expected growth to “slow temporarily” from the latest reading of 2.9% in the third quarter due to further fluctuations in energy production and exports.
Regardless, the central bank’s overall assessment was that higher interest rates will be warranted to achieve the inflation target.
“We will continue to take a gradual approach, guided by incoming data,” the statement said.
The central bank last increased rates by a quarter-point in July in what was its fourth hike since mid-2017.
Economists predict that the BoC will continue with gradual tightening as it remains cautious over trade talks between the U.S. and Canada and predict the next hike will come at the October meeting.
Besides gauging the economic reaction to higher interest rates, the BoC concluded that it is “also monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook.”
U.S. President Donald Trump imposed a deadline of last Friday in order to revamp the North American Free Trade Agreement with Canada but no deal was reached with both parties resuming talks in Washington on Wednesday.
NAFTA is key for Canada as roughly 75% of its total exports are to the U.S., equivalent to about 20% of Canadian gross domestic product.
The Bank of International Settlements estimated last week that a complete breakdown of NAFTA would cause a 2.2% decline in Canada’s GDP.