The Bank of Canada decided to keep its benchmark interest rate unchanged on Wednesday, but warned of rate hikes to come as inflation heats up.
The target for the overnight rate, which impacts rates that Canadian consumers and businesses get from retail banks for savings accounts and debt such as mortgages and lines of credit, remains at 1.25 per cent, the central bank announced.
“Inflation is on target and the economy is operating close to potential,” governor Stephen Poloz told reporters Wednesday.
“That said, interest rates remain very low relative to historical experience. This is because the economy is not yet able to remain at full capacity on its own.”
The economy performed slightly weaker than the bank expected in the first three months of 2018, the central bank said, but it expects that to rebound in the latter half of the year.
The economy is projected to operate slightly above its potential over the next three years, with real GDP growth of about two per cent in both 2018 and 2019, and 1.8 per cent in 2020, the bank said.
Housing and exports were the drivers of that weakness, but the bank expects a boost from increased foreign trade, plus higher wages for Canadians.
The bank said it expects to hike interest rates gradually.
“Higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target,” it said.
The bank’s next scheduled announcement is May 30.