Bank of Canada raises overnight rate for first time in seven years

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The Canadian dollar jumped more than eight-tenths of a cent Wednesday morning (July 12), breaking the 78-cent mark, after the Bank of Canada announced it is increasing the key overnight lending rate by 25 basis points to 0.75%.

This was the first increase in seven years and the first change since July 2015 when the rate was cut to 0.5%. It was also the first increase under Bank of Canada Governor Stephen Poloz.

The move comes as little surprise to analysts.

“Today, words spoke louder than actions, since the actions had been so heavily telegraphed ahead of time,” said CIBC Economics’ Avery Shenfeld in a note to investors.

“Given its remarks in the past month, the Bank of Canada’s quarter-point rate hike had to come soon, and there was no reason to wait beyond July after the last week’s jobs numbers handily topped expectations.”

Canada’s economy has been charging along due in large part to household spending, which has lead to a reduction in economic slack, said the Bank. Rising employment and wages will support solid household spending going forward. Economic growth was strong in the first quarter and, although this is expected to moderate somewhat, it is expected to remain above potential across most industries and regions. Most industries have now adjusted to lower oil prices, the Bank said, and the goods and services sectors are growing.

The central bank also pointed to a strengthening global economy, including that in the United States, as a reason for optimism, but said there still remains geopolitical uncertainty in terms of trade and investment.

The Bank said it expects GDP growth to moderate over the next couple years. In 2017, growth of 2.8% is forecast, followed by 2% in 2018 and 1.6% in 2019.

CPI inflation has eased over the past few months, and all three measures of core inflation are below the 2% rate target. Soft inflation is likely temporary, according to the Bank’s statement, and it is expected to return to close to 2% by mid-2018.

Both Shenfeld and BMO chief economist Douglas Porter say it is possible there will be another rate hike as early as September 6, at the next scheduled Bank of Canada rate announcement, but they say it might wait until the Bank’s next Monetary Policy Report, which is scheduled for October 25.

“Overall, the commentary was upbeat, as to be expected when raising rates,” Porter said. “Thus, the initial indications are that the Bank fully expects to follow through with another rate hike, reversing the emergency cuts of 2015.

“For now, we remain comfortable with looking for a 1.50% overnight rate by end-2018.”

ecrawford@biv.com

@EmmaHampelBIV

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