Bank of Canada raises interest rate to 1%

Posted September 07, 2017

Policy makers raised their benchmark rate for a second time in since July, by 25 basis points to 1 per cent.

"Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation", the Bank of Canada said in a statement from Ottawa. Prime rates are the basis for products like variable-rate mortgages and home equity lines of credit.

In a statement, the Bank of Canada noted that consumer spending remains robust, "underpinned by continued solid employment and income growth".

"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 response, the Canadian dollar suddenly moved to a new two-year high against the USA dollar, trading at 82.38 US cents moments after the release of the statement from 80.58 USA cents right before the announcement.

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Other economists said another rate increase could be delivered in late October, when the Bank of Canada's governing council next meets. It said the Canadian dollar has appreciated - roughly 10% in past three months - and that reflected both domestic strength and weakness in the US currency amid "significant geopolitical risks and uncertainties around" the renegotiation of the North American Free-Trade Agreement, and USA fiscal policy.

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".

"While we can't rule out another rate hike before the end of this year, we should note that the economy is still overly dependent on the heavily indebted household sector to support economic growth", writes David Madani, senior Canada economist at Capital Economics, in a note.

There had been a slight increase in total CPI and the bank's core inflation readings, consistent with the absorption of economic slack.

Wednesday marks the bank's second consecutive rate hike.

The Canadian dollar surged as much as 2.2 percent to post its strongest since June 2015 at C$1.2140.

Since slashing rates because of the global financial crisis dubbed the Great Recession that ended in 2009, central banks have been closely watched for interest rate hikes as a signal that nations are healing from the financial collapse almost a decade ago.

"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.