Bank of Canada leaves rates unchanged; markets mull October hike

OTTAWA (Reuters) - The Bank of Canada held interest rates steady on Wednesday as expected and said more hikes would be needed to keep inflation on target, boosting speculation it could tighten monetary policy next month.

A cyclist rides past the Bank of Canada building, Ontario, Canada, July 11, 2018. REUTERS/Chris Wattie

The overnight interest rate remains at 1.50 percent. The central bank, which maintains a 2 percent inflation target, has raised rates four times since July 2017 amid a strengthening economy.

“Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target. We will continue to take a gradual approach, guided by incoming data,” the bank said in a statement, using language little changed from its last announcement on July 11.

A Reuters poll of economists last week had predicted the central bank was likely to leave rates unchanged. The bank’s next fixed date for unveiling its decision on rates is Oct. 24.

“This really does really leave the door open to October - we continue to look for a hike in October. Obviously, they are not going to pre-commit to it,” said Andrew Kelvin, senior rates strategist at TD Securities.

The Canadian dollar initially gained slightly, touching C$1.3166 to the U.S. dollar, or 75.95 U.S. cents, before settling back to C$1.3185, or 75.84 U.S. cents.

Although Canada’s annual inflation rate surged to 3.0 percent in July, its highest level in nearly seven years, the central bank said it should move back toward 2 percent in early 2019 as the effects of past increases in gasoline prices dissipated.

“The bank is clearly keeping the door open for a rate hike in October, but not really overplaying its cards,” said Sal Guatieri, senior economist at BMO Capital Markets.

Elevated trade tensions remained a key risk to the global outlook, the central bank said.

Canadian and U.S. officials are meeting on Wednesday in a bid to settle disagreements holding up the renegotiation of the North American Free Trade Agreement.

The bank noted the strength of the U.S. economy, a factor of huge significance to Canada, which sends 75 percent of its goods exports to the United States.

Data released on Wednesday by Statistics Canada showed Canada’s trade surplus with the United States hit C$5.3 billion ($4.0 billion) in July, the largest since October 2008.

“It would have been difficult to justify a rate hike even if the economy warranted it today given the overhang of NAFTA uncertainty,” said Royce Mendes, senior economist at CIBC Capital Markets.

($1 = 1.3183 Canadian dollars)

Additional reporting by Allison Martell and Fergal Smith in Toronto; Editing by Susan Thomas and Paul Simao