Bank of Canada hikes rates, shrugging of trade tensions

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Governor Stephen Poloz said that while it was not easy for policymakers to set aside "all the talk" about trade, the bank hiked rates amid increasing confidence in its outlook, with Canada's economy firing on all cylinders despite the tensions. It was Poloz's fourth hike over the last 12 months and marked the first time the rate has been this high since December 2008.

Poloz recently said the impacts of the U.S. -Canada trade dispute would figure prominently in the bank's decision-making process for today's rate announcement.

The tariff fight is expected to shave two-thirds of a percentage from Canada's economic growth by the end of 2020, the bank estimated.

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

"It's evident to us that higher interest rates will be warranted, but of course we're not in a position to say exactly how much higher or at what rate we might get there", Poloz told a news conference Wednesday in Ottawa.

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Another hike this week would come with Canada facing a number of trade-related uncertainties, including NAFTA talks, US steel and aluminum tariffs and the threat of more duties on the economically critical automotive sector.

The Bank of Canada raised the key interest rate a quarter point to 1.5 per cent prompting some of the big banks to increase prime lending rates.

If the trade dispute deteriorates further, resulting in something as damaging to the economy as auto tariffs, hiking the interest rate now would also give Poloz more flexibility to lower it down the road, if necessary. According to ratehub.ca, a mortgage worth $400,000 amortized over 25 years with a 5-year variable rate of 2.50 per cent, will now cost $50 per month or $600 per year.

"The Bank maintained a cautious tone while highlighting its data dependency, that said, this was not the "dovish" hike many, including ourselves, expected".

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