Bank of Canada Raises Interest Rates in Response to Economy Surge
The central monetary institution of the country, the Bank of Canada made a surprising announcement saying that it has hiked its key interest rate. This hike in the overnight lending rate is the second raise in two months in an economy that is showing rapid growth. Analysts are surprised at the rate of a quarter of a percentage point to 1%, a move they had not expected before October in the final quarter of the year.
A statement released by the bank revealed that “Recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly based and self-sustaining.”
Right after the announcement, the Canadian Dollar soared more than a cent to a high of 82 U.S. cents. This rise is impressive given that the loonie had dropped to a low of around 73 U.S. cents in April. In the past month, it has shown a jump of 3%.
So, What are the Next Expected Moves?
Chief economist at the Bank of Montreal, Douglas Porter opines that the central bank is projecting a “seeming care-free stance on the soaring Canadian dollar,” and predicts that the bank could continue with its current trend of dynamic interest hikes in the coming months.
With the newest hike, the Bank of Canada seems to be stressing on its previous indication that the trends of low interest and ready availability of affordable finance will be changing. The bank’s hike in interest rates may have fallouts on the costs of mortgage, deposits, and bonds.
Even as the economy is showing an impressive surge, experts are predicting more upcoming raises with another expected hike later in the year. For instance, Brian DePratto, economy expert at the Toronto-Dominion Bank says, “Absent a significant shock, [Wednesday’s] rate increase will be part of a larger and longer march towards rate normalization.”
As for the Bank of Canada’s moves on future hikes, it has hinted in its statement that they will be “predetermined and will be guided by incoming economic data and financial market developments.”
There is a possibility of further hikes sometime in October when the bank will also reveal its forecast of the final quarter of 2017.
The Bank is Watching the Economic Conditions in the Country
The statement released by the bank indicates that it is aware of the conditions in the country such as “robust” spending habits of the people, “cooling” prices in housing, and “solid” growth in employment and income rates in addition to “more widespread strength” in investments in businesses and exports.
However, inflation rates have not kept up with the bank’s objective of less than 2%. The bank has stressed on the “slight increase” in its strategies to reduce inflation. But, at the same time, it has indicated that salaries and price levels are not as worrying as those in other developed nations.
As the bank’s statement reveals, “Given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates,” the bank is concerned about how the rise in lending rates will impact Canadians who are heavily in debt.
In the past few years, bank officials have been keeping a close watch on the high risk borrowing habits of Canadians and are aware that there will be fallouts of soaring borrowing rates and decline in housing prices. The bank has been issuing warnings about the inflated real estate prices in regions like B.C. and southern Ontario.
The Surge in Economy has Been Largely Unexpected
Not only was the interest rate hike unexpected by economists and financial markets, but the rapid growth in the economy was an unlikely phenomenon that bank officials did not estimate. That’s a fact that Governor Stephen Poloz and his colleagues at the Bank of Canada admit.
As the bank statement says, “The level of GDP growth is now higher than the bank expected.”
Experts estimate that the surge in the economy has caused a hike in the Canadian loonie that had been trading at over 80 U.S. cents before the bank’s announcement on Wednesday. In fact, Statistics Canada released a report last week saying that the growth in the economy by 4.5% in the second quarter is a strong rise as compared to the 3.7% in the first quarter. This economic surge is almost twice the growth estimated by the Bank of Canada and is the highest among the Group of Seven countries.
In essence, the bank has reinstated the interest rate that stood in January 2015 when the bank lowered rates to combat the sharp drop in oil prices.