Bank of Canada Anticipates a Growth in Economy by 2.8% in 2017
In anticipation of a robust economic growth in the year 2017, the Bank of Canada, central bank of the country has announced a raise of 0.75% on its key interest rate. This rise in the cost of borrowing is the first of its kind in the last seven years. The bank has also announced a rise in the target overnight rate to 0.75% which is a quarter of a percentage point rise from 0.5%. For the uninitiated, the overnight rate is the rate at which the main banking organizations make one-day loans among each other.
In its statement, The Bank of Canada has described household spending as the key reason behind the growth of the economy, and "As a result, a significant amount of economic slack has been absorbed." Experts also expect that the remaining slack as predicted in the bank’s April Monetary Policy Report is likely to be covered by the end of the year.
Increase in the Rates of Interest Not Entirely Unexpected
In the last few weeks, senior officials at the Bank of Canada have hinted at the improving economy in several speeches and interviews.
Stephen Poloz, governor at the Bank of Canada, addressed a press conference on Wednesday in Ottawa. He revealed that the bank is aware of the fact that inflation is lagging behind the declared target of 2% but also predicts that the low inflation rates is a temporary phase. For this reason, the bank has gone ahead with its plans to raise the interest rates.
To quote Stephen Poloz, "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." He added, “It is about where we expect inflation to be,” and that the bank is estimating a 2% "modest overshoot" of the targeted inflation in 2019.
Poloz continued in his statement that the economy "can handle very well this move we have today and of course you need to preface that with an acknowledgment that of course interest rates are still very low.” He added that, “ People need to understand that in the full course of time I don't doubt that interest rates will move higher, but there's no predetermined path in mind at this stage. Any future changes to the central bank's key interest rate will depend on economic data in the months ahead.”
More Increments Expected Soon
Craig Wright is the chief economist at the RBC. In his opinion, the bank’s move may be an indication of a rise in the interest rates on a long-term basis. As Wright revealed to CBC News Network, "I think it's the Bank of Canada having confidence that the breadth and durability of the expansion in Canada can sustain these small increases in interest rates." He also added, “We're going to see more [rate hikes] as we move forward, assuming growth holds up.”
Janet Yellen at the Federal Reserve is also looking at higher rates. In a press release, she said, "The Federal Reserve will also likely increase rates in [the fourth quarter]. Look for a slow crawl upward in interest rates from both central banks in 2018."
The Canadian Economy is Performing Exceptionally
Overnight rates fixed by the Bank of Canada have remained unchanged since August 2010 when they went up to 1%. Once Poloz assumed the position of the governor of the bank, ov
er the next five years up to 2015, the rates dropped twice to 0.5%. They have remained at this position until Wednesday when the bank announced a hike.
The bank has also announced estimates of a 2.8% growth in the economy and real gross domestic product (GDP) in 2017. These are more favorable conditions as compared to the 2.6% estimates of April 2017. Forecasts for the coming years stand at a moderate 2% for the year 2018 and 1.6% for 2019.
Impact on Consumers
As a fallout of the rising interest rates, consumers can expect to pay more for lines of credit and variable-rate mortgages. In addition, by early Wednesday afternoon, the value of the Canadian dollar has appreciated with a rise of 0.93 of a cent at 78.32 cents US.