Bank of Canada Surprises With Another Rate Rise

Bank of Canada leapfrogs Fed, other central banks on rate hikes

The Bank of Canada again raised its key rate by 25 basis points on Wednesday, making it switch to 1 %.

A bit of good news in the Statistics Canada report was that income growth had exceeded spending, reflected in increased savings rates.

"Bank of Canada (BoC) surprised economists and hiked the policy rate by 25bps to 1.0%".

With the Bank of Canada meeting later on this week, it is an exciting time for CAD bulls who have seen their outlook strongly confirmed by a stunning GDP figure in the most recent release which has appeared to fully condone the decision of the BoC to move towards a more hawkish policy.

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.

- The Bank of Canada raised the overnight lending rate to 1.00% from the previous 0.75%.

Governor Stephen Poloz is trying to strike a balance between bringing interest rates back to more normal levels amid the strongest growth spurt in more than a decade, without harming an economy that is only now beginning to fully recover from an nearly decade-long downturn.

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Business investment and exports have also broadly strengthened, it said. That marked the central bank's first rate hike in seven years.

The Canadian dollar initially surged on the news to a fresh two-year high, although it pared back some of the early gains.

"Recent economic data have been stronger than expected, supporting the Bank's view that growth in Canada is becoming more broad-based and self-sustaining", the bank said in the accompanying statement. "That was possible when housing prices were rising rapidly and interest rates were at record lows".

Given the stronger-than-expected economic performance, Governing Council judges that today's removal of some of the considerable monetary policy stimulus in place is warranted. In effect, the Bank of Canada fully removed the two rate cuts from 2015, which were meant to counter the negative impact of falling commodity prices.

The explanation regarding the Canadian dollar's rise suggests the central bank "isn't quite as obsessed" with the currency's value versus the US dollar as traders had long believed, according to Bipan Rai, currency strategist with Canadian Imperial Bank of Commerce.

"There remains some excess capacity in Canada's labour market, and wage and price pressures are still more subdued than historical relationship would suggest", according to the statement. The Canadian Dollar is being aided by geopolitical risks, uncertainty around worldwide trade, and fiscal policies remain uncertainty in The United States.

Future policy will be determined by evolution of the economy with close attention paid to the sensitivity of the economy to higher interest rates given elevated household indebtedness.

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