Rate Disclosed By Bank Of Canada

Reuters

The Bank of Canada announced Wednesday that it raises its key interest rate by a quarter percentage-point to 1.25 percent.

The Bank of Canada is widely expected to hike its benchmark interest rate for the third time in a year this morning.

The bank also said governor Stephen Poloz's team is closely watching the economy's ability to grow without driving up inflation. However, it cautions about the substantial improbability linked to the possible changes of policy by the United States, which is its major dealing partner.

The Bank's outlook takes into account a small benefit to Canada's economy from stronger USA demand arising from recent tax changes. A homeowner today with a $300,000 25-year mortgage can easily get a variable rate starting at three per cent, costing them $1,419.74 a month. Trade-policy uncertainty is expected to hold back exports by 0.7% by 2020, the bank said.

According to the central bank, the Canadian economy is expected to have grown at an average pace of 3 percent in 2017, while the economy is expected to expand 2.3 percent in 2018.

Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity.

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While more rate hikes are probably warranted, some continued monetary policy accommodation will likely be needed to maintain optimal growth and inflation, the bank said, signaling it will not rush to return rates to more normal levels after they were slashed to historic lows in the wake of the financial crisis. The latest increase follows two hikes in July and September. It predicted Canada's high levels of household debt would amplify the effects of higher interest rates on consumption.

"In this case the Bank of Canada highlighted a number of reasons why it would be cautious going forward, which led to the market seeing it as a dovish rate hike".

Economist Frances Donald with Manulife agrees with that assessment, telling CBC News in an interview that while the market was expecting as many as three hikes this year, the situation is fluid. We concur with the Bank's assessment that "some accommodation will likely be needed to keep the economy operating close to potential and inflation on target" and we believe that the Bank will need to slow the pace of rate hikes in 2019 (we now have the overnight rate holding at 2.25%, below the 3.00% mid-point of the Bank's estimated neutral rate range, largely reflecting the impact of higher rates on high household debt).

The gap between the two-year yield and its US counterpart widened by 1.7 basis points to a spread of -26.2 basis points, its widest since December 18.

Reaction to the rate move was muted, as the decision was very much expected.

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