As most economists predicted, the Bank of Canada (BoC) has raised its overnight lending rate by 25 basis points for the second time in only a few months. The overnight rate is now one per cent.
This reverses the emergency rate cuts made back in 2015 when the economy was lagging and crude oil was trading at a multi-year low, leading to two years of stagnant rates at 0.5 per cent.
The back-to back interest rate hike now comes amid surprisingly good economic data that shows sustained growth across most sectors in Canada.
In its press statement released immediately after the announcement this morning, the Bank of Canada says GDP growth is now higher than what they predicted:
“Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth. There has also been more widespread strength in business investment and in exports.”
The BoC also claims it was encouraged by better inflation, despite targets still not being met:
“While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Bank’s core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack.”
Who will the rate hike affect?
The Canadian dollar spiked immediately upon news of the rate hike – now trading comfortably above 81 cents USD. This is good news for cross border shoppers, international travellers and businesses that buy goods regularly from the United States. But it can put a strain on the manufacturing industry that relies heavily on trade with our neighbours to the south.
The hike in the overnight interest rate will also inevitably mean a higher cost of borrowing for anyone with a floating rate loan, like a variable rate mortgage or a line of credit. Currently, all of the major banks are holding their prime mortgage rate at 2.95 per cent. But as we saw in July following the last rate increase, it’s expected that the banks will raise this rate again in the coming days to reflect the higher cost of borrowing.
On another note, potential home buyers could be experiencing some more relief soon. Higher rates could cause house prices to cool, as they did following the rate hike in July. But the Bank says the lower home prices are mainly due to a combination of higher interest rates and a response to recent changes in tax and housing finance policies in parts of Canada.
The next scheduled overnight rate target announcement is Oct. 25, 2017. The BoC’s next full update featuring its outlook on the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report at the same time.