• USMCA and the Coming Interest Rate Increases

    The Bank of Canada may have just received the green light it needed to move forward with its desired interest rate increases over the remainder of this year and into 2019.

    The new United-States-Mexico-Canada Agreement (USMCA), which replaces NAFTA, finally removes the uncertainty that clouded Canada’s trade future with its biggest trading partner.

    “For the BoC, this clearly gives them a green light to hike in October and does bump the odds of further rate hikes over the year,” BMO chief economist Douglas Porter wrote in a recent note. “While rate hikes will likely stay gradual, the pace may pick up slightly more than previously expected over the coming year.”

    Similarly, National Bank Financial economist Krishen Rangasamy wrote that the announcement of the trade deal with the U.S. “removes the last obstacle to monetary policy normalization by the Bank of Canada.”

    Markets are 86% priced in for a rate hike at the BoC’s October 24 meeting, with most analysts now forecasting three additional rate hikes to come in 2019. That would bring the overnight lending rate to 2.50%, its highest level since 2008.

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