Bank of Canada Maintains Overnight Rate Target at 1.5%

Carola Singer • September 5, 2018

As expected, the Bank of Canada held its key overnight rate this morning at 1.5%, asserting that July’s surprising spike in CPI inflation to 3% was in large part because of a jump in airfares. The Bank expects inflation to move back towards 2% in early 2019, as the effects of past increases in gasoline prices dissipate. The Bank’s core measures of inflation remain firmly around 2%, consistent with an economy that has been bumping up against full capacity for some time. Wage growth, as well, remains moderate.

Incoming information on the global economy is consistent with the Bank’s forecast in the July Monetary Policy Report (MPR). The US economy has been particularly strong, growing at a 4.2% rate in the second quarter. This compares to Canada’s growth rate of 2.9% last quarter, which follows a 1.4% pace of economic expansion in Q1. Second quarter growth in the US was boosted by strong consumer spending and business investment. In Canada, third quarter growth is expected to slow temporarily, mainly because of fluctuations in energy production and exports.

Indeed, this morning, Statistics Canada reported that Canada’s trade deficit all but disappeared. A sharp export gain to the US combined with a decline in imports took Canada’s overall merchandise trade deficit to its lowest level since December 2016.

Canada’s merchandise trade surplus with the US, targeted by President Trump in NAFTA negotiations, grew to the widest in a decade. Stats Canada said that gains in global exports were led by automobiles and energy, almost all of which were bound for the US. Crude oil led the energy gains as prices rose 9.4% in July. The import decline was driven by aircraft and metal ores.

These figures are likely to impact the resumption of bilateral talks in Washington regarding NAFTA, as the Trump administration has negotiated a new deal with Mexico and has threatened to leave Canada out and impose stiff auto tariffs if Trudeau’s government does not make concessions, especially on dairy supply management and dispute mechanisms.

The Bank of Canada highlighted that “elevated trade tensions remain a key risk to the global outlook and are pulling some commodity prices lower…The Bank is also monitoring the course of NAFTA negotiations and other trade policy development closely, and their impact on the inflation outlook.”

It was wise of the Bank of Canada to hold its powder dry at today’s policy meeting given the continued uncertainty on the NAFTA front. An agreement on NAFTA would provide the central bank with more comfort in moving ahead with a hiking cycle that has already lifted the benchmark overnight rate four times since mid-2017.

Noting that “activity in the housing market is beginning to stabilize as households adjust to higher interest rates and changes in housing policies”, the Bank reaffirmed that the economy is doing well enough to require higher interest rates in the future to achieve the inflation target. Another rate hike could come as soon as the next policy meeting on October 24th.

It is widely expected that a NAFTA deal will have come to fruition by then, opening the way for the Bank to resume monetary tightening. According to Bloomberg News, “Investors see near-certain odds that by October, the Bank of Canada will raise borrowing costs for the fifth time since the hiking cycle began in July 2017, with as many as two additional increases by mid-2019.”.

This commentary was written by Dr. Sherry Cooper, DLC’s Chief Economist. Below is the Bank of Canada rate announcement.

FOR IMMEDIATE RELEASE
September 5, 2018

The Bank of Canada today maintained its target for the overnight rate at 1 ½ per cent. The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent.

CPI inflation moved up to 3 per cent in July. This was higher than expected, in large part because of a jump in the airfare component of the consumer price index. The Bank expects CPI inflation to move back towards 2 per cent in early 2019, as the effects of past increases in gasoline prices dissipate. The Bank’s core measures of inflation remain firmly around 2 per cent, consistent with an economy that has been operating near capacity for some time. Wage growth remains moderate.

Recent data on the global economy have been consistent with the Bank’s July Monetary Policy Report (MPR) projections. The US economy is particularly robust, with strong consumer spending and business investment. Elevated trade tensions remain a key risk to the global outlook and are pulling some commodity prices lower. Meanwhile, financial stresses have intensified in certain emerging market economies, but with limited spillovers to other countries.

The Canadian economy is evolving closely in line with the Bank’s July projection for growth to average near potential. Following growth of 1.4 per cent in the first quarter, GDP rebounded by 2.9 per cent in the second quarter, as the Bank had forecast. GDP growth is expected to slow temporarily in the third quarter, mainly because of further fluctuations in energy production and exports.

While uncertainty about trade policies continues to weigh on businesses, the rotation of demand towards business investment and exports is proceeding. Despite choppiness in the data, both business investment and exports have been growing solidly for several quarters. Meanwhile, activity in the housing market is beginning to stabilize as households adjust to higher interest rates and changes in housing policies. Continuing gains in employment and labour income are helping to support consumption. As past interest rate increases work their way through the economy, credit growth has moderated and the household debt-to-income ratio is beginning to edge down.

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. In particular, the Bank continues to gauge the economy’s reaction to higher interest rates. The Bank is also monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook.

RECENT POSTS 

By Carola Singer March 17, 2026
For many Canadians, the dream of homeownership has felt like a moving target. After years of market volatility, shifting interest rates, and economic uncertainty, you might be wondering: is 2026 finally the year to make a move?
By Carola Singer March 11, 2026
Why Work With an Independent Mortgage Professional? If you’re in the market for a mortgage, here’s the most important thing to know: Working with an independent mortgage professional can save you money and provide better options than dealing directly with a single bank. If that’s all you read—great! But if you’d like to understand why that statement is true, keep reading. The Best Mortgage Isn’t Just About the Lowest Rate It’s easy to fall for slick marketing that promotes ultra-low mortgage rates. But the lowest rate doesn’t always mean the lowest cost . The best mortgage is the one that costs you the least amount of money over time —not just the one with the flashiest headline rate. Things like: Prepayment penalties Portability Flexibility to refinance Amortization structure Fixed vs. variable terms …can all affect the true cost of your mortgage. An independent mortgage professional looks beyond the rate. They’ll help you find a product that fits your unique financial situation , long-term goals, and lifestyle—so you’re not hit with expensive surprises down the road. Save Time (and Your Sanity) Applying for a mortgage can be complicated. Every lender has different rules, documents, and policies—and trying to navigate them all on your own can be time-consuming and frustrating. When you work with an independent mortgage professional: You fill out one application They shop that application across multiple lenders You get expert advice tailored to your needs This means less paperwork , less stress , and more confidence in your options. Get Unbiased Advice That Puts You First Bank specialists work for the bank. Their job is to sell you that bank’s mortgage products—whether or not it’s the best deal for you. Independent mortgage professionals work for you. They’re provincially licensed, and their job is to help you: Compare multiple lenders Understand the fine print Make informed, long-term financial decisions And the best part? Their services are typically free to you . Mortgage professionals are paid a standardized fee by the lender when a mortgage is placed—so you get expert guidance without any out-of-pocket cost. Access More Mortgage Options When you go to your bank, you’re limited to that bank’s mortgage products. When you go to an independent mortgage professional, you get access to: Major banks Credit unions Monoline lenders (who only offer mortgages) Alternative and private lenders (if needed) That’s far more choice , and a much better chance of finding a mortgage that truly fits your needs and goals. The Bottom Line If you want to: Save money over the life of your mortgage Save time by avoiding unnecessary back-and-forth Access more lenders and products Get honest, client-first advice …then working with an independent mortgage professional is one of the smartest decisions you can make. Let’s Make a Plan That Works for You If you're ready to talk about mortgage financing—or just want to explore your options—I'm here to help. Let's connect and put together a strategy that makes sense for your goals and your future. Reach out anytime. I’d be happy to help.