Economy & Markets

The Bank of Canada’s key overnight rate is forecast to reach 2% by the end of 2018

By James Langton |

Canada's economy continues to generate exceptional growth, but looks set to slow closer to its long-term potential in 2018, as consumer spending pulls back, says RBC Economics in a forecast published on Friday

According to the latest RBC Economic Outlook, real gross domestic product (GDP) growth will come in at 3.1% for 2017, powered by a combination of strong consumer and government spending, coupled with robust business investment. This represents an increase of 0.5 percentage points from RBC's June outlook.

"Canada's economy continues to hit it out of the park. For the fourth consecutive quarter, we've seen above-potential growth, and despite the cooling of the housing market and uncertainly around NAFTA, we expect the momentum to carry through to the end of the year," says Craig Wright, senior vice president and chief economist at RBC.

Looking ahead to 2018, consumer spending will likely ease, according to RBC's forecast, with growth slowing to 2.2% for 2018.

In terms of monetary policy, in the wake of a surprise rate hike from the Bank of Canada this week, RBC says that it sees rates continuing to head higher in the months ahead — and it forecasts that the overnight rate will reach 2% by the end of 2018, up from 1% currently. And, amid higher rates, RBC now expects the Canadian dollar will average close to US80¢ through the coming year.

For the global economy, RBC continues to expect GDP growth of 3.5% in 2017 and 3.6% in 2018.

In the United States, RBC forecasts 2.2% growth in 2017, rising to 2.4% in 2018. "We remain optimistic about the U.S. economy even though the level of political uncertainty remains elevated," the outlook says.

Against this backdrop, RBC expects the U.S. Federal Reserve will wait until December to raise rates to 1.5%, before resuming tightening on a quarterly basis in 2018. It forecasts that the U.S. rate will end 2018 at 2.5%.

Within Canada, RBC has also revised several forecasts, including a large upside revision for Alberta, which it now sees generating 4.2% growth this year, up from its previous forecast of 2.9%. RBC now sees the province slowing to 2.9% in 2018.

RBC has also upgraded its forecast for Quebec, which it sees generating 2.8% growth in 2017; just behind Ontario's 2.9%.