OTTAWA: The Bank of Canada held interest rates steady on Wednesday, as expected, but said more hikes will be needed over time amid progress on the dynamics of wage growth and inflation, two issues that have concerned the central bank.
In altering its long-repeated notes of caution on price and wage pressures, the bank sounded a more hawkish tone on the future of interest rates, which have been increased three times since last July.
"Some progress has been made on the key issues being watched closely by the Governing Council, particularly the dynamics of inflation and wage growth," the bank said in a statement.
"This progress reinforces Governing Council's view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target."
The bank reiterated that policymakers "will remain cautious" with respect to future rate moves, guided by incoming data as it monitors the economy's sensitivity to rate hikes and the evolution of economic capacity. It also revised upward its gauge of potential output growth, which gives the economy more room to grow without inflation pressures creeping up.
While the bank trimmed its economic growth forecast for 2018 it hiked the outlook for 2019, saying the economy is operating with little slack and the temporary factors weighing on inflation have "largely dissipated," as expected.
It boosted its forecast for 2018 inflation but expects inflation to return to the bank's 2 percent target for the rest of the projection horizon.
Projected growth in the United States, Canada's largest trading partner, has been boosted by government spending plans, but the bank said "escalating geopolitical and trade conflicts" risk undermining global expansion.
The bank said exports will strengthen as demand increases, but said growth is increasingly being limited by capacity constraints. Investment should build capacity, but both investments and exports are being held back by competitiveness challenges and worries about trade policy, it said.
While changes in mortgage rules pulled forward housing activity to late 2017 and exports faltered in the first quarter on transportation bottlenecks, the weakness in both "are expected to be unwound as 2018 progresses," the bank said.
Consumption growth remains robust as incomes rise, and while the bank has long pointed to signs of labor market slack, it softened its concern, saying it will "continue to assess labor market data for signs of remaining slack."
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