Bank of Canada forges ahead with rate hike as economy surges

Saul Bowman
September 7, 2017

Policymakers raised their benchmark rate 25 basis points to 1 percent, the second increase since July.

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.

Read in whatever light, it looks like the Bank of Canada is sending a message that the days of completely easy money are coming to an end.

In its statement, the Bank of Canada said there had been "widespread strength" in exports and business investment.

News of Canada's strong second quarter GDP performance also strengthened the loonie against the USA greenback.

The Bank of Canada surprised many when it hiked rates and left the door open to more rate increases in 2017 even as it pledged to pay attention to how higher borrowing costs would hit Canada's indebted households.

Going forward, the central bank said it expects a moderation in the pace of economic growth in the second half of 2017, but already gross domestic product (GDP) is higher than it had forecast. That would typically be a strong signal to policy makers that interest rates need to rise.


The statement said that removal of "some" of the "considerable" stimulus was warranted, which suggests that at these levels the Bank still views policy as very stimulative.

Canada's currency climbed as much as 1.8 per cent after the decision, reaching $C1.2146 against its United States counterpart, the highest intraday level since June 2015, and extending the gain this year to 10 per cent.

At this meeting, there was no new Monetary Policy Report (MPR) and Governor Poloz will not be holding a press conference. The suggestion is the Canadian dollar gains aren't totally reflective of Canadian growth and it was the first reference to the Canadian dollar in a rate statement since March.

The BOC raised rates again and sent the Canadian dollar shooting higher.

Looking ahead, the bank insisted future rate decisions will not be "predetermined" and will be guided by upcoming economic data releases and financial market developments.

The rest of the statement has a hawkish tone and is optimistic on growth, while at the same time mentioning the geopolitical risks (and uncertainty about worldwide trade).

"Particular focus will be given to the evolution of the economy's potential, and to labour market conditions". It noted, however, that upward pressure on wages and prices remain more subdued than historical trends would suggest, which has also been seen in other advanced economies.

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