Canada maintains key lending rate at 1.5 percent

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Ottawa (AFP)

Canada's central bank maintained its key lending rate at 1.5 percent on Wednesday, despite inflation pressures it predicts are likely to dissipate in the coming months.

The Bank of Canada, however, said higher interest rates soon "will be warranted to achieve (its) inflation target," which is in line with analysts' expectations.

Going forward, the bank said it would continue to monitor Canadians' reaction to higher interest rates, as well as the course of North American Free Trade Agreement negotiations scheduled to resume in Washington on Wednesday.

The bank last increased interest rates in July by 25 basis points, after a previous hike in January -- bringing rates to the highest level in a decade.

"An October rate hike looks highly likely if, as we expect, we have the makings of a NAFTA deal by then," commented CIBC Economics analyst Avery Shenfeld.

In July, inflation moved up to three percent, above the central bank's two percent target.

But the bank said it expects inflation "to move back towards two percent in early 2019," as gas prices pull back from recent highs.

It noted that Canada's economy has been operating near capacity for some time, while wage growth remains moderate.

"Elevated trade tensions remain a key risk to the global outlook and are pulling some commodity prices lower," the bank noted.

Uncertainty about trade policies continue to weigh on businesses, but business investment and exports have been "growing solidly for several quarters," it said.

Activity in the housing market, meanwhile, is beginning to stabilize as households adjust to higher interest rates and changes in housing policies.

Continuing gains in employment and 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," the bank also noted.