Bank of Canada raises interest rate to one percent

EDITORIAL: Debt levels a concern

The Bank of Canada on Wednesday raised its benchmark interest rate by a quarter-percentage point to 1%, signaling further increases are in the works as Canada's economic growth roars to the top among Group of Seven countries.

Given the stronger-than-expected economic performance, Governing Council judges that today's removal of some of the considerable monetary policy stimulus in place is warranted.

The decision came as a surprise.

The overnight rate was raised by 25 basis points to 1.0%, versus economists' expectations that it would be kept unchanged.

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.

The majority of economists surveyed by Bloomberg forecast that the central bank would hold at this meeting.

"What they are saying to me is they are leaving the door open to futurehikes", said Derek Holt, head of capital markets economics at Bank of NovaScotia in Toronto.

Meanwhile, signals from senior Federal Reserve officials have clouded the outlook for rates in the USA with concerns inflation hasn't picked up steam as previously expected.

"The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices", said the Bank, but it noted that "significant geopolitical risks and uncertainties around worldwide trade and fiscal policies remain, leading to a weaker USA dollar against many major currencies". As previously mentioned, this is dependent on how the Canadian economy reacts to the interest rate hike, with particular attention being paid to household debt moving forward.

The Bank of Canada forged ahead with another interest rate hike in a nod to the country's surging economy, while signalling its appetite for further tightening may be curbed by a rising Canadian dollar and sluggish inflation. As of June 30, or the end of the second quarter, Canada's economy expanded 3.7% on a one-year basis, the best among G-7 economies. The Bank of Canada have made it clear that any future interest rate decision will be made exclusively on economic data releases, and as such have not given any further signals to monetary policy decisions. There has also been more widespread strength in business investment and in exports. Statistics Canada reported on Wednesday that exports fell 4.9 per cent in July, blaming the phenomenon on a higher loonie. Yet, Canada's merchandise trade deficit with the rest of the world narrowed in July from the previous month because imports also declined deeply.

The Bank also stated that consumer spending is on the rise, and supported by solid employment and income growth, and said that the level of Gross Domestic Product (GDP) is higher than they had expected, a point supported by the Government recently.

The bank advised that it is still on watch for potential speed bumps, such as geopolitical risks and uncertainties that abound, such as concerns about global trade and undetermined fiscal policies throughout the globe. As of press time, the dollar was trading at 81.9 cents U.S. It was the first reference to the Canadian dollar in a rate statement since March.

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