May 23, 2018

Bank of Canada raises interest rate to one percent

07 September 2017, 01:51 | Simon Arnold

EDITORIAL: Debt levels a concern

The Canadian got a big boost on Tuesday moving up to trade above 81 cents US ahead of a Bank of Canada decision on interest rates

Canada's three biggest lenders said the Bank of Canada's decision to raise interest rates on Wednesday would boost their profits over the next year, although one executive warned the central bank not to lift rates too quickly.

The decision "implies that absent a significant shock, Wednesday's rate increase will be part of a larger and longer march towards interest-rate normalization", said Brian DePratto, TD Bank economist.

Interestingly, the BoC did also reference elevated household indebtedness and the impact that these rate rises could have on it.

The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices.

In a statement Wednesday, the bank said solid employment and wage growth led to strong consumer spending, while the key areas of business investment and exports also improved.

The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent. And there were maybe fewer hints of a prolonged pause in hikes from here than we would have expected, now that rates are back to where they stood before the oil shock.

Others predicted the bank would refrain from moving the rate out of concern such a move would drive up an already strengthening Canadian dollar and pose a risk to exporters. Only five of 26 economists surveyed by Bloomberg News expected the central bank to hike its benchmark rate. "That was possible when housing prices were rising rapidly and interest rates were at record lows".

Market watchers who predicted Bank of Canada Governor Stephen Poloz would keep interest rates unchanged this week argued he had the luxury to wait until October, noting inflation remained tepid.

Given the stronger-than-expected economic performance, Governing Council judges that today's removal of some of the considerable monetary policy stimulus in place is warranted.

The canadian banks have immediately reacted to the announcement.

The Bank of Canada said there remains "significant geopolitical risks and uncertainties" around worldwide trade and fiscal policies that have weakened the United States dollar.

Future rate decisions, the bank said, would continue to be guided by economic data and financial market developments.

"After [last week's] blowout GDP figures, we now see little reason for the BoC to wait before hiking interest rates again", Shenfeld wrote in a client note, adding that an increase will likely be accompanied by a statement "to remind Canadian dollar bulls that they will be very patient on further hikes".

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