Economy & Markets

With domestic growth fueling inflation, Scotiabank predicts the Bank of Canada will increase rates three times this year

By James Langton |

 

Canadian gross domestic product growth is forecast to slow to 2.3% in 2018, but will remain well above potential, adding to inflation pressures and requiring further tightening by the Bank of Canada, suggests a report published Friday by Bank of Nova Scotia.

In its Global Outlook report, the bank predicts three interest rate hikes in 2018, and expects the first increase to come on Jan. 17, with the others projected for May and October.

Similarly, the bank expects the U.S. Federal Reserve to boost rates by 75 basis points in 2018, although the Fed's first move likely won't be until March.

"With reasonably stable oil prices, this should leave the Canadian dollar hovering around the US80¢ range for most of the year," the report says.

Canada's economy faces its share of risks, including the possible scrapping of NAFTA, "But the strength in global activity is a powerful tonic against trade-related uncertainties," the report says.

Indeed, Bank of Canada governor Stephen Poloz has articulated five major concerns for the Canadian economy in recent months: NAFTA; inflated housing markets; household indebtedness; labour markets; and cybersecurity, the report notes.

"While all five issues are important considerations for policymakers, we don't expect developments on any of these fronts to meaningfully derail the outlook we've sketched for the Canadian economy," the report says.

Other possible risks to Canada's economy include the introduction of Canada's carbon-pricing regime, a decline in corporate tax competitiveness following U.S. tax cuts, and increasing labour-market rigidity, but these are "longer-term issues that could affect Canada's performance over the next five to 10 years, rather than crimp the outlook for 2018 and 2019," the report says.

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