Bank of Canada raises benchmark interest rate to 1.5 per cent

13 July, 2018, 00:06 | Author: Regina Silva
  • Stephen Poloz

Analysts at Rabobank explained that the Bank of Canada raised the policy rate 25bp to 1.50% as was widely expected.

USA tariffs on the auto sector's integrated cross-border supply chains would have "large impacts on investment and employment", the Bank of Canada warned Wednesday in its accompanying monetary policy report.

The fourth rate increase since July 2017 comes as Canada grapples with the pressures of rising inflation and solid job growth despite an increasingly hostile USA trade policy that could choke off demand from Canada's largest export market.

Business loans, student loans, lines of credit and home equity lines of credit will cost more to service.

The decision will likely prompt Canada's big banks to raise their prime rates, thereby passing on the rate increase along to their customers.

But it is watching what happens in trade tensions with the United States, that it predicts will cut almost 0.7 per cent from economic growth by the end of 2020.

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Another hike this week would come with Canada facing a number of trade-related uncertainties, including NAFTA talks, US steel and aluminum tariffs and the threat of more duties on the economically critical automotive sector.

"The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar".

"Canada's economy continues to operate close to its capacity and the composition of growth is shifting", said the BOC. Temporary factors are causing volatility in quarterly growth rates: the Bank projects a pick-up to 2.8 per cent in the second quarter and a moderation to 1.5 per cent in the third.

In addition to tariffs, Canadian businesses must also contend with the uncertainty surrounding the stalled talks on NAFTA's renegotiation.

Economists anticipate several more hikes this year and in 2019.

TD senior economist Brian DePratto wrote in a note to clients Wednesday that the messaging is consistent with a central bank that's "committed to a rate hike cycle, but leaves sufficient room to adjust to evolving events".

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