After the monthly meeting on July 11, the Bank of Canada raised the interest rate to 1.5%. In Q1 the Central Bank's representative voiced plans for the summer rate revision depending on the CPI dynamics. As it was expected, the regulator increased the rate, so Canada has broken the trend and ended a 7 year long soft monetary period. The Central Bank started making policy changes just in 2017 – the interest rate rose to 1.25% (1% earlier) this January. However, some analysts believed that the Bank would not go further. The recent meeting showed that the regulator follows now tight monetary policy.
The inflation was definitely one of the main drivers for the Bank of Canada. For now, the CPI stands at the target of 2%, but the regulator expects its upturn to 2.5% in H2 2018. Still, the next year is believed to bring another CPI slowdown back to 2%. Notably, the Central Bank noted that further revisions are possible until the end of the year.
Central Bank's believe that Canada benefits from high oil prices, especially for its oil and gas sectors. However, this factor also can boost inflation. Higher interest rate can promote the strengthening of the Canadian dollar against its American counterpart. However, once Canada had raised the interest rate, the US dollar added 0.8%, so Canadian currency has now a room for an upturn driven by reports about possible new increases. The US dollar-to-Canadian dollar rate can develop within some 1.308-1.32. The upward decision of the Bank of Canada may also be a guideline for other central banks, that are ready for monetary tightening, in particular, US Federal Reserve and BOE. The latter will hold meetings in early August.