Central bank hikes rate, predicts modest overall impact from U.S. tariff fight

OTTAWA — The Bank of Canada is raising its benchmark interest rate in an economy that it predicts will remain resilient even as it faces an even bigger bite from deepening trade tensions.

The hike is the central bank’s first interest rate move in six months and lifts the trend-setting rate to 1.5 per cent, up from 1.25 per cent.

The bank says persistent trade uncertainty and Canada’s tariff fight with the United States will shave nearly 0.7 per cent from economic growth by the end of 2020 — but it predicts the blow to be largely offset by the positive impact of higher oil prices.

The Bank of Canada is also releasing its quarterly update of projections, which predicts slightly stronger growth in both 2019 and 2020, compared with its outlook in April.

The central bank says Canadian growth will continue to see bigger contributions from exports and business investment, while it expects household spending to represent a smaller share due to the dampening effects of higher interest rates and stricter mortgage rules.

Looking ahead, the bank says it expects higher interest rates will be necessary over time to keep inflation near its target, however, it intends to continue along a gradual, data-dependent approach.

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