Bank of Canada Lifts Rates for Second Time in 8 Weeks

Stephen Poloz Bank of Canada

Having only raised interest rates for the first time since 2010 at the last meeting, traders were clearly of the belief that the BoC would hold off today and take a more cautious approach to tightening. The Canadian dollar initially surged on the news to a fresh two-year high, although it pared back some of the early gains.

Data from Statistics Canada revealed the economy expanded at an annualized rate of 4.5 per cent in the April to June period, far above economists' consensus forecast of 3.7 per cent.

"What they are saying to me is they are leaving the door open to futurehikes", said Derek Holt, head of capital markets economics at Bank of NovaScotia in Toronto.

Wednesday marks the bank's second consecutive rate hike.

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.

Meanwhile, signals from senior Federal Reserve officials have clouded the outlook for rates in the US with concerns inflation hasn't picked up steam as previously expected. Inflation remains below the Bank of Canada's 2% target, but the bank said it has evolved as expected in July, with slight rises in headline and underlying inflation reflecting shrinking spare capacity.

It pledged to pay particular attention paid to the economy's potential, job-market conditions and any potential risks for Canadians from the higher costs of borrowing.

Since slashing rates because of the global financial crisis dubbed the Great Recession that ended in 2009, central banks have been closely watched for interest rate hikes as a signal that nations are healing from the financial collapse almost a decade ago.

Only six of 26 economists surveyed by Bloomberg News expected the central bank to hike its benchmark rate.

But a higher loonie could also slow Canada's economic momentum, as it will make exports more expensive. Yet, Canada's merchandise trade deficit with the rest of the world narrowed in July from the previous month because imports also declined deeply. It also cited more "widespread strength" in business investment and exports, and "stronger-than- expected indicators of growth" globally.

The bank advised that it is still on watch for potential speed bumps, such as geopolitical risks and uncertainties that abound, such as concerns about global trade and undetermined fiscal policies throughout the globe.

When it comes to trade with the USA, newly elected American President Donald Trump has threatened to tear up the North American Free Trade Agreement, with his administration already taking steps to make it more expensive for Canadian softwood lumber to enter the US markets. Compared with a basket of other currencies, the Canadian dollar has climbed just 1.1%, Mr. Rai said.

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