Published: Thu, September 07, 2017
Global Media | By Garry Long

The Bank of Canada's increase in its key interest rate again

The Bank of Canada's increase in its key interest rate again

Analysts are busily upgrading their forecasts in the wake of last week's bullish economic data and Wednesday's interest rate hike. Prime rates are the basis for products like variable-rate mortgages and home equity lines of credit.

That followed unexpectedly healthy growth in the first three months of 2017 and exceeded the Bank of Canada's projections.

The bank also said that although the global economy is seeing stronger than expected growth indicators there are "significant geopolitical risks and uncertainties around worldwide trade and fiscal policies remain, leading to a weaker USA dollar against many major currencies".

"Recent economic data have been stronger than expected, supporting the Bank's view that growth in Canada is becoming more broadly-based and self-sustaining", it said in a statement.

The Canadian dollar, which had been trading around 80.5 cents USA on Wednesday morning, spiked by more than a cent to around the 82-cent mark immediately after the Bank of Canada's announcement.

Nevertheless, BoC said that while removing some of the "considerable" monetary stimulus that was in place was "warranted", further policy decisions were not "predetermined".

The overnight rate was raised by 25 basis points to 1.0%, versus economists' expectations that it would be kept unchanged.

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Meanwhile, Statistics Canada reports that Canada's trade deficit in July shrank to $3.04 billion, thanks to a strong Canadian dollar that cut the value of imports (-2.3%) and depressed exports (-1.1%). "With the housing market teetering even before rates began to rise, we expect the economy to lose momentum before the year is over, prompting the Bank to abort its rate hike cycle", Madani continues.

But particular focus, it said, will be given to labor market conditions, and given Canadians' high level of indebtedness, "to the sensitivity of the economy to higher interest rates". However, significant geopolitical risks and uncertainties around worldwide trade and fiscal policies remain, leading to a weaker U.S. dollar against many major currencies.

The Bank of Canada forged ahead with another interest rate hike in a nod to the country's surging economy, while signalling its appetite for further tightening may be curbed by a rising Canadian dollar and sluggish inflation.

SEB Research comments on today's BoC policy decision in which central bank raised rates by 25bp to 1.0%.

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

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