BoC: Strong growth vs. NAFTA uncertainty - ING

Analysts at ING point out that following a raft of strong activity data and a pick-up in inflation, the Bank of Canada raised the target for its overnight rate to 1.25% at its January meeting.

Key Quotes

“Two bumper jobs reports and stronger inflation readings led policymakers to conclude that the economy is "operating roughly at capacity". And there are few reasons to see that coming to an end. We see further upside to growth given the better global backdrop and higher commodity demand.”

“NAFTA remains the big unknown. US-Canadian trade flows equate to 32% of Canadian GDP so any disruption would be very bad news should President Trump decide to pull the plug on the agreement. With the next round of talks taking place shortly before the President's State of the Union address on 30th January, the risk is coming more sharply into focus and the Bank of Canada has said that the associated uncertainty is "clouding the economic outlook".”

“That said, we are encouraged by Trump’s recent comments, hinting at a growing willingness to work with Mexico and Canada on a NAFTA compromise. As such, we are predicting two more 25bp hikes in the second half of 2018.”