Bank of Canada delivers another hike, key interest rate rises to 1.5%

  • Bank of Canada delivers another hike, key interest rate rises to 1.5%

Bank of Canada delivers another hike, key interest rate rises to 1.5%

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.

The July projection also incorporates the estimated impact of tariffs on steel and aluminum recently imposed by the United States, as well as the countermeasures enacted by Canada.

Thanks to stronger economic data, experts are predicting governor Stephen Poloz to hike the rate from its current level of 1.25 per cent. This is contributing to financial stresses in some emerging market economies. Yet, the Canadian dollar is lower, reflecting broad-based USA dollar strength and concerns about trade actions.

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. Household spending is being dampened by higher interest rates and tighter mortgage lending guidelines. Inflation ran at a 2.2-per-cent pace in May, slightly above the Bank's target of 2 per cent. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors.

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

Money markets see a almost 70 per cent chance of further Bank of Canada tightening by December.

Poloz has followed a cautious, data-dependent approach in recent months and he hasn't touched the rate since raising it in January, a move that came after two earlier increases in the second half of 2017.

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.