The Bank of Canada (BoC) made their much anticipated interest rate announcement this morning June 1, 2010 and the verdict was an increase in the target for the overnight rate by 0.25% to 0.50%. This is the first interest rate increase by the Canadian Central Bank since 2007. Opinion has been divided over the past month on whether Governor Mark Carney would actually increase the Bank’s key interest rate.
After the last rate announcement where the BoC removed their conditional commitment to keep interest rates level until July, many thought that that was a definite indication that rates would go up before then.
However, with increasing concern about how Greece’s debt troubles would affect the global economy and signs that the housing market was slowing down in Canada, expert opinion gravitated towards the opposite spectrum with the consensus that the central bank didn’t want to tighten the economy too soon and stop the economic recovery before it really got started. Recent strong economic data started swaying consensus back to a rate hike and it looks like the initial opinions were right.
Our Mortgage Rate Outlook Panel also thought the Bank of Canada would increase rates today, and as a result thought variable rates would also increase in the short term.
Here are some of the main comments the Bank of Canada cited in their announcement this morning:
- The global economic recovery is proceeding but is increasingly uneven across countries, and most of the G7 countries recovery are dependent on continued stimulus
- The debt problem in Greece and its effect on the Euro will increase borrowing costs in Europe, but Canada has not been affected just yet although we’ve seen a small fall in commodity prices
- The economic recovery in Canada is going on as they expected with q1 2010 growth of 6.1% driven by housing and consumer spending
- Inflation has been in line with the Bank’s projections
The statement ended with an interesting bit of information as this latest announcement “leaves considerable monetary stimulus in place” meaning we’re still doing a tremendous amount to help the economy and we’ve simply moved the key interest rates up from effectively 0% – so don’t over-react.
Also, many experts have been saying that this is the first in a continuous string of interest rate increases to get us back to “normal” levels, however, the Bank of Canada said that their is still considerable uncertainty and further rate increases are not a given.
Now let’s sit back and see how the bond markets and the big Canadian banks react to this news.