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Bank of Canada Raises Interest Rates for the fourth time in 12 Months

Bank of Canada has raised their overnight rate by 0.25%, bringing it to 1.50%. Which for most lenders will likely increase their Prime rate to 3.70% from the previous 3.45%.


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.


What is the Bank of Canada Overnight Rate?

The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market.

The Bank of Canada holds this Key Lending rate. They might lower it to encourage borrowing and spending OR they may increase it to curb inflation and debt levels.

Major lenders typically raise their prime rate when there is a hike. Thats the number they use to set interest rates for loans and mortgages.

Unlike a fixed rate where one is locked in to their rate, those in a variable rate will be affected by these changes. Home owners with fixed rate mortgages won't be affected until they have to renew.

More Increases to come?

Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data. In particular, the Bank is monitoring the economy’s adjustment to higher interest rates and the evolution of capacity and wage pressures, as well as the response of companies and consumers to trade actions.

Globe and Mail | Barrie McKenna

“Higher interest rates will be warranted to keep inflation near target and [the bank] will continue to take a gradual approach, guided by incoming data,” the bank said in a statement accompanying the rate decision.

Many economists expect three or four more rate increases by the end of 2019, keeping the Bank of Canada in step with the pace of rate hikes by the U.S. Federal Reserve. At 1.5 per cent, the benchmark rate is still well below the estimated “neutral” level of 2.5 to 3.5 per cent – the point where rates neither heat up the economy nor put the brakes on growth.

Financial Post | Kevin Carmichael

All things equal, the revision suggests the central bank will be less pressed to raise interest rates in the future. The central bank aims to keep inflation advancing at an annual rate of about 2 per cent, which it thinks it is on track to achieve over the next couple of years, although it said inflation may jump temporarily due to a combination of higher gasoline prices, increased minimum wages, tariffs and a weaker currency.

Next Market Update on Rate and Economic Outlook

September 5, 2018

The next scheduled date for announcing the overnight rate target is September 5, 2018. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on October 24, 2018.


Current Economic Outlook

Globe and Mail | Barrie McKenna

“There are worries ahead [and] growth hasn’t been stellar, but the backdrop has been just good enough for the Bank of Canada to nudge rates a quarter-point higher,” CIBC chief economist Avery Shenfeld​ said in a research note.

The Canadian dollar initially bounced on the rate hike, rising roughly half a cent from morning lows. However, by late morning, most of the gains were lost with the dollar turning lower to trade at 76.11 US cents just before 11:30 a.m. (ET).

The Bank of Canada acknowledged Wednesday that the hit to the Canadian economy from mounting trade turmoil is likely to be larger than it anticipated in earlier forecasts.

“The possibility of more trade protectionism is the most important threat to global prospects,” the bank said in the statement.

U.S. President Donald Trump said this week that he intends to go ahead with tariffs on another US$200-billion of Chinese goods. China warned it will respond in kind, ratcheting up a potentially destructive showdown between the world’s two largest economies. Mr. Trump is also threatening tariffs on imports of cars and parts from Canada and other countries.

Nonetheless, the Bank Canada insisted the overall impact of trade tensions is still manageable, given the overall strength of the economy. “Although there will be difficult adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest,” the bank said.

The combination of tariffs already imposed and ongoing trade uncertainty will knock 0.6 per cent off the level of gross domestic product by the end of 2020, according to the bank’s quarterly Monetary Policy Report, also released Wednesday.

The bank pointed out that the higher price of oil – now just shy of US$74 a barrel – and stronger U.S. growth are offsetting the harm caused by trade problems.

But the estimate of the trade fallout does not take into account the U.S. threat to impose additional duties on imported vehicles and parts – a move the bank warns would cause “large negative spillovers” on consumer spending and business investment across the Canadian economy.

So far, the U.S. has imposed tariffs on newsprint, softwood lumber, steel and aluminum – representing 4.1 per cent of Canadian exports. Ottawa has responded with retaliatory tariffs on U.S. imports.

Overall, the bank expects Canada’s economy to grow 2 per cent in 2018, 2.2 per cent next year and 1.9 per cent in 2020. That’s virtually unchanged from its previous forecast, issued in April.

But the bank said temporary factors may create volatility from quarter to quarter. The bank says growth will reach an annual pace of 2.8 per cent in the April-to-May quarter, and then slow to 1.5 per cent in the third quarter.

Elsewhere, the Canadian economy is evolving pretty much as Bank of Canada Governor Stephen Poloz and his central bank colleagues had anticipated. Higher interest rates and tighter mortgage lending rules are cooling off the housing market and consumer spending.

That is being offset by higher exports and business investment.

Inflation is now running near 2 per cent, “consistent with an economy operating close to capacity,” according to the bank.

An ongoing puzzle for the bank is the relatively slow pace of wage growth – now rising at an annual pace of 2.3 per cent. That is significantly slower than it should be for an economy at near full capacity.​



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