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Bank of Canada raises interest rates for second time this year

Bank of Canada has raised their overnight rate by 0.25%, bringing it to 1.00%. Which for most lenders will increase their Prime rate to 3.20% from the previous 2.95%.

This was an expected increase as we saw 2 decreases of 0.25% back in 2015 during the oil & gas crash. Now that we are seeing this stabilize these rates were expected to come back up. See our blog below that we posted back in July that will shed some light on the effects of this rate increase.

Again this change will have an impact on those with a Variable Rate Mortgage or Home Equity Line of Credit. It will mean a $13 a month payment increase for every $100,000.

Bank of Canada has raised their overnight rate back in July by 0.25%, bringing it to 0.75%. Which for most lenders has increased their Prime rate to 2.95% from the previous 2.70%.

Speaking at a news conference on Wednesday in Ottawa, Bank of Canada governor Stephen Poloz acknowledged that the bank raised its key rate despite inflation currently lagging below its stated target of two per cent.

Poloz said the bank considers that weakness in inflation to be temporary, dragged down by lower gasoline prices, electricity rebates in Ontario, intense food price competition and unexpectedly weak car prices.

"It is worth remembering that it can take 18 to 24 months for a monetary policy action to have its full effect on inflation. This means that central banks must target future inflation by anticipating future deviations from target."

More increases to come?

RBC chief economist Craig Wright thinks the bank's move signals a turning point to a longer-term trend in rising interest rates.

Many economists are expecting at least one more rate hike this year, most likely in October, when the bank releases its next quarterly forecast. That being said, the Bank of Canada Governor Stephen Poloz and his central bank colleagues aren’t yet ready to pull the trigger on a second rate hike this year. The bank insisted that any future rate hikes would be guided by the effect of “incoming data” on inflation, according to the statement.

Current Status

Inflation remains one of the puzzles facing central banks – not just in Canada, but globally. Canada’s Consumer Price Index (CPI) currently sits well below the bank’s 2 per cent target and continues to drift lower.

But the Bank of Canada is apparently looking ahead to conditions that will likely prevail a year or two from now. Inflation may weaken further in the months ahead before getting back to the two per cent target by the middle of next year as excess capacity in the economy fades, according to the bank’s Monetary Policy Report, released Wednesday.

“Higher interest rates are what is needed to reduce the vulnerability of high household indebtedness and real estate price imbalances in parts of the country,” Conference Board of Canada chief economist Craig Alexander said. “[Wednesday’s] decision to raise rates is a positive development.”

The bank did, however, significantly underestimate the strength of consumption this year – most notably the hot housing markets in Ontario and B.C.

The central bank warned of a series of risks that could derail its latest forecast. These include rising trade protectionism, a house price correction in Toronto and Vancouver and weaker than expected exports and business investment. The bank likewise cited a number of factors that could cause the economy to grow faster than expected, including stronger U.S. growth and more debt-fueled consumption in Canada.



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