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Interest Rate Rise Announced

 
2017/07/12 12:31:48 PM
Interest Rate Rise Announced

The Bank of Canada has raised its key interest rate as expected to 0.75 per cent — the central bank's first move upward in the cost of borrowing in seven years.

The bank's target for the overnight rate — at which major financial institutions make one-day loans to each other — moved up by one-quarter of a percentage point from 0.50 per cent.

In a statement accompanying the rate decision, the central bank said the Canadian economy has been robust, fuelled by household spending.

"As a result, a significant amount of economic slack has been absorbed," the bank said, adding that the remaining slack is expected to be gone around the end of this year, which is earlier than the bank anticipated in its April  Monetary Policy Report.

 

The move means consumers will likely pay more for borrowing such as variable-rate mortgages and lines of credit.

In the wake of the rate hike, the Canadian dollar shot up. The loonie was trading up 0.64 of a cent at 78.03 cents US late Wednesday morning. 

 

The interest rate increase had been widely expected after senior Bank of Canada officials signalled in speeches and interviews over the past weeks that lower rates had done their job, and the Canadian economy was performing well.

More increases seen coming

RBC chief economist Craig Wright thinks the bank's move signals a turning point to a longer-term trend in rising interest rates.

"I think it's the Bank of Canada having confidence that the breadth and durabiity of the expansion in Canada can sustain these small increases in interest rates," Wright told CBC News Network.

'We're going to see more [rate hikes] as we move forward, assuming growth holds up," he said.

Sherry Cooper, chief economist at Dominion Lending Centres, said she expects another rate hike in the fourth quarter of this year.

"The Federal Reserve will also likely increase rates in [the fourth quarter]," Cooper said in a release. "Look for a slow crawl upward in interest rates from both central banks in 2018.

Performing well

The Bank of Canada hadn't increased the overnight rate since August 2010, when it nudged it up to one per cent. After Stephen Poloz took over as governor of the bank, the rate was lowered twice in 2015 to 0.5, where it remained until Wednesday.

With the economy performing well, the bank has also nudged up its forecast for growth this year. The bank said real gross domestic product (GDP) is now expected to grow by 2. 8 per cent in 2017, up from the April outlook of 2.6 per cent. 

The central bank said growth is expected to moderate over the next two years, coming in at two per cent in 2018 and 1.6 per cent in 2019.

http://www.cbc.ca/beta/news/business/bank-canada-interest-rate-monetary-policy-1.4200814

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