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Canadian economy ready for higher interest rates, central bank official says

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Canadian economy ready for higher interest rates, central bank official says

The Bank of Canada's policymakers debated whether to speed up the pace of potential interest rate hikes with the economy apparently capable of coping with higher rates, said central bank Senior Deputy Governor Carolyn Wilkins.

The central bank on Sept. 5 stood pat on its key interest rate but cited the need for higher rates in the future. The bank also said it will continue to take a gradual, data-dependent approach to monetary policy.

But the bank "discussed whether the gradual approach to raising rates that we have been taking over the past year remains appropriate," Wilkins said in remarks prepared for a Sept. 6 speech outlining some of the deliberations of the latest rate decision.

"It is a natural question to ask, given that the economy has been operating at potential for the past year and it is in this part of the cycle when interest rates typically rise to preempt a buildup in inflation pressures," Wilkins told the Saskatchewan Trade & Export Partnership. She added that growth has been solid and broad-based, with households "generally adjusting well to higher interest rates."

Canada's GDP rose at a seasonally adjusted annualized rate of 2.9% in the second quarter, double the pace in the previous quarter and in line with the central bank's forecast. Inflation, meanwhile, accelerated more than expected in July.

"Today, the policy rate is still relatively low … The data and other information we have received since July reaffirm Governing Council's view that higher interest rates will be required to achieve our inflation target," Wilkins said.

The central bank expects quarterly GDP growth to be volatile for the rest of 2018, but to average around 2%, according to Wilkins. She said the current pace of growth can be sustained without sparking excessive inflation.

"[W]e still acknowledge that there may be more room to grow without causing inflation than we have built into our forecast," Wilkins said, while also noting that the economy has become more sensitive to rate hikes than in the past due to high levels of household debt.

Ultimately, the central bank decided that a gradual approach to raising rates remains appropriate, Wilkins said, with uncertainties over the international trade environment "front and center" in the latest rate decision.

"[P]rotectionist measures create risks to the upside for inflation, especially when the economy is operating near full capacity," she said.

The central bank estimates that reduced confidence and trade measures already in effect will shave off about two-thirds of 1% from Canada's GDP by 2020, according to Wilkins.