NEW Bank of Canada Raises Interest Rate to 1.25%

Randall Padilla
January 18, 2018

The bank also said governor Stephen Poloz's team is closely watching the economy's ability to grow without driving up inflation.

The Canadian dollar closed at an average trading value of 80.48 cents USA, down 0.04 of a USA cent, recovering from greater losses earlier in the session after the central bank said it would raise its key interest rate target by a quarter of a percentage point to 1.25 per cent.

The central bank has increased the trend-setting rate to 1.25 per cent, up from one per cent.

The global economy continues to strengthen, with growth expected to average 3 1/2 per cent over the projection horizon.

The fourth quarter of 2017 and the first quarter of 2018 are each expected to see annualized growth of 2.5 per cent. "But in this case the rate hike itself was already reflected in market the real question on investors' minds was would the Bank of Canada provide more hawkish guidance about future rate hikes?" said Todd Mattina, a chief economist at Mackenzie Investments.

The price of oil, one of Canada's major exports, rose ahead of the release of US petroleum data that was expected to show a ninth straight weekly drawdown in crude inventories.

The Bank of Canada is widely expected to hike its benchmark interest rate for the third time in a year this morning.

"Business investment has been increasing at a solid pace, and investment intentions remain positive", the bank said.

The bank said "some continued monetary policy accommodation will likely be needed" to keep the economy operating close to its full potential.

Given high household debt levels, the unknown impact of tighter stress tests for uninsured mortgages that came into effect this year and uncertainty surrounding NAFTA renegotiations, the bank must be cautious about how quickly it raises rates in order to avoid derailing the economy. It raised rates in July and September of a year ago, both by quarter percentage points. While the move means borrowers can expect to pay more, savers can expect to earn more, too, on savings accounts and guaranteed investment certificates.

Subdued exports are the top risk in light of NAFTA uncertainty and recent imposition of tariffs by the U.S. Also, more rapid potential output, stronger U.S. growth and more robust consumer spending were seen as risks. The Bank expects CPI inflation to fluctuate in the months ahead as various temporary factors (including gasoline and electricity prices) unwind.

Heading into the decision Wednesday, Scotiabank Economics forecasted three hikes totalling 75 basis points throughout 2018 and three more in 2019. "The bank's statement put NAFTA uncertainties right up front".

The BoC is expected to raise interest rates in order to cool off personal lending and the red-hot Canadian housing sector.

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