Bank of Canada raises interest rate to 1.75%

Central bank's benchmark rate pushes up borrowing costs for consumers

Pete Evans · CBC News · Posted: Oct 24, 2018 10:00 AM ET

 

The Bank of Canada has raised its benchmark interest rate by a quarter point for the fifth time since last summer, pushing up the cost of borrowing for Canadians.

The bank's rate is now set at 1.75 per cent.

Known as the target for the overnight rate, the benchmark is what Canada's big banks charge each other for short-term loans. It filters down to consumers, because it affects the rates the banks offer their customers for things like variable rate mortgages and savings accounts.

Canada's central bank kept its interest rate at record lows for several years to stimulate the economy following the economic slowdown of 2008, but has since begun to ratchet it higher as the economy gets back on sounder footing.

Economists are expecting a few more rate hikes to come, but the bank hinted on Wednesday that it wants to see how current rates are affecting the economy before proceeding.

"In determining the appropriate pace of rate increases, [the bank] will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt," the bank said.

In explaining its decision to raise the rate, the bank noted the recently announced free trade deal with the United States and Mexico as a reason for optimism about Canada's economy.

The bank also said it expects household spending to increase at "a healthy pace."

Candice Bangsund, a portfolio manager at investment firm Fiera Capital interpreted the bank's statement as a clear sign it has very strong confidence in the outlook for the economy — which means rate hikes to come.

"The bank's constructive and upbeat tone in the statement is not all that surprising given that the economy is operating near full capacity and core inflation is hovering around target, while trade tensions have receded substantially following the successful renegotiation of NAFTA," she said.

The bank meets eight times a year to set its interest rate, and its next such meeting is scheduled in six weeks on Dec. 5.

Trading in investments known as overnight index swaps currently implies that investors think there's about a 25 per cent chance of another rate hike on that day. But regardless of what happens then, investors are expecting two more hikes between now and March, bringing the bank's rate to 2.25 per cent.

Currency investors clearly see more rate hikes to come, as the loonie gained half a cent as soon as the decision came out. (Rate hikes push up the value of a currency, because they make it more worthwhile to invest in the country's money.)

The loonie was changing hands at just under 77 cents on Wednesday morning, its highest level in a week.

To find out more please visit the website https://www.cbc.ca/news/business/bank-canada-interest-rate-1.4875958