Rate Hike Alert: Bank of Canada Raises Overnight Rate to 0.75%

BOC

For the first time in almost seven years, the Bank of Canada has raised its key interest rate. In its scheduled Monetary Policy Report (MPR), the bank announced this morning that it is increasing the rate by 25 basis points from 0.5 per cent to 0.75 per cent.  The last time the bank increased its rate was in August 2010.

Since the overnight rate generally impacts the prime interest rate between banks, shortly after the announcement, all five of the big banks announced they would be increasing their prime rates by 25 basis points as well, to 2.95 per cent. Prior to the announcement, the prime lending rates at CIBC, The Royal Bank of Canada, Bank of Montreal, TD Canada Trust and Scotiabank all sat 2.7 per cent.

Hike was expected

Rumours of a rate hike had been swirling around since BoC Governor Stephen Poloz made several leading comments to the media, stating low interest rates have “done their job” for the economy. He also said that despite inflation being low, there are other factors to consider before a rate hike in order to be in step with the economy when it reaches full capacity.

Optimism in Canada’s economy

Going forward, it is clear that the BoC is much more optimistic about the Canadian economy. The bank sounded significantly more hawkish in this report than the last, mentioning “Recent data have bolstered the Bank’s confidence in its outlook.”

According to the bank, Canada’s economy has been robust and fuelled by household spending. For this reason, a significant amount of economic slack has been absorbed.  And an increase in employment and wages means household spending will remain solid in the months ahead.

The growth is also widespread across various industries and regions, and this points to more sustainable growth across the country. The bank expressed increased confidence in business investment growth due to results from its most recent Business Outlook Survey. It also noted the economy has adjusted to lower oil prices and therefore goods and services are now expanding.

Forecasts now predict the Canadian economy will grow by 2.8 per cent in 2017 – up from the last forecast of 2.6 per cent.

Soft inflation not a concern

Though inflation remains below the bank’s target of two per cent, it believes softer inflation is temporary. The expectation is inflation will return to approximately two per cent by the middle of 2018 due to heightened food price competition, electricity rebates in Ontario, and changes in automobile pricing.

Changes in borrowing rate for Canadians

The rate hike could possibly mean higher borrowing costs for Canadians. Since the big commercial banks decided to also raise their prime rate due to the BoC rate increase, anyone with a variable rate mortgage or a floating rate loan, like a line of credit, will more than likely have to pay more to service it. A higher borrowing rate also means Canadians will qualify for less when applying for loans. This could subsequently impact the real estate market as buyers won’t be able to offer as much.

More hikes

With Canada’s economy showing strength and the Bank of Canada’s optimism, economists are now expecting the bank to raise rates one more time in 2017.

The next scheduled Bank of Canada announcement is Sept. 6, 2017. Moreover, the next full update on the bank’s outlook on the Canadian economy, inflation, and risks to the projection will be published in the MPR on Oct. 25, 2017.

Related Topics

Economic News / Mortgage News / Mortgages / Personal Finance News / RSM News

4 thoughts on “Rate Hike Alert: Bank of Canada Raises Overnight Rate to 0.75%

  1. This is another time that Canada is following the footstep of the big brother USA in increasing the prime lending rate! albeit without any significant impetus as stated in the Governor’s media note: which is contradictory and vague to its most contents.
    By the way the G8 and World economic giants’ rates are still as follows: UK 0.25%, EU 0.0%, Israel 0.10%, Japan 0.0%(since last 50+ years), Sweden -0.5%, Swiss -0.75%.
    The rate hike is against all the objections lodged by Real Estate market which is already flattened by the governments vague policy direction and threats; and the small scale industry association who objected to minimum wage hike and would do no service to the industries and businesses. It would create job loss, reduction of low salaried persons’ work hours, less enthusiasm for the builders and mass scale reduction of real estate development and related market closure, if not corrected as soon as possible.
    By the way Canadian economy and the citizens do not make any money by increasing the BOC prime rate, other than reducing inflation (which is presently non existent at lower than 2%!); but it does a lot of disservice by impeding the business owners and developers who need ready cash flows via short term borrowing for their businesses to grow to compete with the world economy. Mohammed

    • Well stated. Wish BofC took all this into consideration and not increased the prime lending rate. They will be the only one to blame when the “optimistism” of the Canadian economy turns into economic downturn.

  2. Big banks had reduced only 0.15% vs 0.25% of BOC rate cut in 2015. But now banks raising 0.25% instead of 0.15%, that’s not a fair deal to the big banks customers.

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