Bank of Canada raises overnight rate target to 1 ½ per cent

Image of daily change for major currencies

The Bank of Canada is also releasing its quarterly update of projections, which predicts slightly stronger growth in both 2019 and 2020, compared with its outlook in April. The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar. This is contributing to financial stresses in some emerging market economies.

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 US cents.

Canada's economy continues to operate close to its capacity and the composition of growth is shifting.

The country's inflation rate is expected to rise as high as 2.5% - above the 2% mid-point of the bank's target range - due to temporary factors such as higher gasoline prices. "A statement announcing a rate hike has to sound hawkish enough to explain why the move was necessary, and this one met that mark by citing stabilizing housing, better exports and capital spending despite trade tensions, and roughly two per cent growth ahead". Meanwhile, exports are being buoyed by strong global demand and higher commodity prices.

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The central bank said it expects the Canadian economy to expand by 2 per cent per year on average between 2018 and 2020, noting that recently implemented tariffs on steel and aluminium will likely have only "modest" effects on growth and inflation. It's expected to settle back down to 2% in the second half of 2019. This effect is now judged to be larger, given mounting trade tensions.

The fourth rate increase since July 2017 comes as Canada grapples with the pressures of rising inflation and solid job growth despite an increasingly hostile USA trade policy that could choke off demand from Canada's largest export market. Although there will be hard adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest.

At the rate decision, BoC officials said they expect "higher interest rates will be warranted to keep inflation near target", offering some insight on the stance of the bank heading into future rate decisions. The interest charged on this kind of debt typically goes up when the Bank raises its rate.

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