Bank of Canada surprises with interest rate hike

07 September, 2017, 01:38 | Author: Gregory Stephens
  • Bank of Canada leapfrogs Fed, other central banks on rate hikes

At its previous meeting in July, the BoC raised its key rate for the first time in seven years, also by 25 basis points. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada's economy.

"What they are saying to me is they are leaving the door open to futurehikes", said Derek Holt, head of capital markets economics at Bank of NovaScotia in Toronto.

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.

"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", reads a statement from the central bank.

Meanwhile, signals from senior Federal Reserve officials have clouded the outlook for rates in the US with concerns inflation hasn't picked up steam as previously expected.

The high level of household debt and its impact on real estate prices was one of the motivating factors behind the decision and given that the economy is on more solid footing the Governing Council of the Boc made the decision to remove the stimulus it had placed in 2015 with its two rate cuts.

Canadian GDP growth expanded more quickly than expects, the Bank said.

Bank of Canada leapfrogs Fed, other central banks on rate hikes

In its statement, the bank also said headline and core inflation have seen slight increases since July, largely as expected. Particular focus will be given to the evolution of the economy's potential, and to labour market conditions.

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.

Statistics Canada reported weak trade results just before the release of the Bank of Canada's decision. For the second-straight month, Canadian exports fell steeply - 4.9% in July. As well, consumer spending - boosted by strong employment and income growth - has been "robust", and business investment and exports have been increasing, the Bank said, which has all contributed to economic growth that exceeded analysts' expectations.

Canada's trade deficit shrank to $3 billion in the month, from $3.8 billion in the month before, because imports fell even faster than exports, shrinking six per cent.

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 worldwide trade and undetermined fiscal policies throughout the globe.

"A rising Canadian dollar without a really good lift from energy prices is tough on the energy sector, and it's tough on any commodity producers", said John Johnston, chief strategy officer at Davis-Rea.


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