Bank of Canada forges ahead with rate hike as economy surges

Sep 07, 2017, 01:53
Bank of Canada forges ahead with rate hike as economy surges

The Bank of Canada increased interest rates by 0.25% to 1.00% following the latest policy meeting, the second successive rate hike.

The loonie soared this morning after the Bank of Canada announced an increase in its key lending rate, a move that caught some market watchers by surprise.

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

Only six of 26 economists surveyed by Bloomberg News expected the central bank to hike its benchmark rate.

"The Bank made very little attempt to push back against the strength of the Canadian dollar and also very little attempt to suggest that this is merely (removing) two insurance cuts and then we are on hold for a while", said Bipan Rai, senior macro strategist at CIBC Capital Markets, referring to a pair of 2015 rate cuts meant to combat the effect of plunging oil prices. It also cited more "widespread strength" in business investment and exports, and "stronger-than- expected indicators of growth" globally.

Coming into Wednesday, only a select group of economists and analysts thought the Bank of Canada would hike rates. Two rate hikes in a row after such a sustained period of none is a bold move and traders may now be expecting more in the months ahead.

News of Canada's strong second quarter GDP performance also strengthened the loonie against the USA greenback.

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The Bank of Canada, which also increased rates in July, left the door open to more hikes in 2017.

The Canadian dollar continued its upward climb on the news, trading up around 81.8 US cents to gain about 1.2% on the day and 1.6% already this week.

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.

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.

The bank advised that it is still on watch for potential speed bumps, such as geopolitical risks and uncertainties that abound, such as concerns about global trade and undetermined fiscal policies throughout the globe. Any adjustment will eventually be reflected in the price of loans to consumers and businesses, while having a direct influence on the variable-rate mortgage loans and the exchange rate of the canadian dollar. Compared with a basket of other currencies, the Canadian dollar has climbed just 1.1%, Mr. Rai said.

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

"There remains some excess capacity in Canada's labour market, and wage and price pressures are still more subdued than historical relationship would suggest", according to the statement.

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