Published: Wed, July 11, 2018
Business | By Kate Woods

Central bank hikes rate, predicts modest overall impact from US tariff fight


As widely anticipated by economists, the Bank of Canada raised its trend-setting policy rate to 1.5 per cent, up from 1.25 per cent on Wednesday.

"This U.S. dollar move offsets, and even more so, the somewhat hawkish BoC hike", said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in NY.

Looking ahead, the bank says it expects higher interest rates will be necessary over time to keep inflation near its target, however, it intends to continue along a gradual, data-dependent approach.

At 2.11 p.m. EDT, the Canadian dollar was trading 0.7 per cent lower at $1.3206 to the greenback, or 75.72 USA cents.

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The Bank of Canada today increased its target for the overnight rate to 1 ½ per cent.

"This rate hike signals that the Bank of Canada is determined to bring its benchmark overnight rate back to more normal levels and that the economy is strong enough to withstand further rate increases", Sherry Cooper, chief economist at Dominion Lending Centres, wrote in a research note.

The decision will likely prompt Canada's big banks to raise their prime rates, thereby passing on the rate increase along to their customers.

The bank's relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in almost four weeks, and economists said they expected the central bank to hike again by year end.

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However, the negative blow of the trade policies recently put in place are to be largely offset by the positives for Canada from higher oil prices, which are above US$73 per barrel, and the stronger USA economy, the bank said. Talks to renegotiate the North American Free Trade Agreement stalled earlier this year, and Canada imposed retaliatory tariffs this month.

Scott Hannah says higher interest rates have also helped to cool down the country's real estate markets, helping future homeowners.

The bank, however, noted in its report that despite "healthy" labour market conditions, employment growth and average hours worked have slowed down compared to last year's surge. Temporary factors are causing volatility in quarterly growth rates: the Bank projects a pick-up to 2.8 per cent in the second quarter and a moderation to 1.5 per cent in the third.

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