The Bank of Canada raised its benchmark interest rate by a quarter of a point to one per cent on Wednesday.
It’s the second time this year that the central bank has upped the rate, after hiking it for the first time in seven years in July.
The central bank’s rate has an impact on lending rates that consumers and savers get from banks on mortgages, lines of credits, savings accounts and other financial vehicles.
The bank’s rate — officially known as the target for the overnight rate — is now back to where it was at the start of 2015, when the central bank started slashing rates to stimulate a Canadian economy that had been waylaid by the oil price crash.
Loonie pops above 82 cents
The Canadian dollar gained more than a penny in reaction to the news on Wednesday, and was changing hands at 82 cents US — the loonie’s highest level since June 2015.
Economists and currency traders had been expecting the bank to hike its rate at some point this year, but that timeline was moved up in recent weeks after a series of data points showed the Canadian economy was starting to heat up.
Last Thursday, Statistics Canada reported the Canadian economy had its strongest first half to the year since 2002, which the bank alluded to in its statement.
“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,” the bank said.
“The level of GDP is now higher than the bank had expected.”
While the bank’s statement was careful to manage expectations of more rate hikes to come, stressing that “monetary policy decisions are not predetermined and will be guided by incoming economic data,” currency traders weren’t taking quite such a cautious tone, and were quickly ramping up their expectations of even more rate hikes to come.
Within minutes of the central bank’s decision, currency swap contracts were giving 75 per cent likelihood of another rate hike after the bank meets next month.
“The market isn’t really listening to that,” Bank of Montreal economist Doug Porter said, referring to the bank’s attempts to pour water on expectations of more hikes to come. “Given today’s abrupt hike, with no prior communication since the previous meeting, and the bank’s seeming care-free stance on the soaring Canadian dollar, we can’t rule out anything in coming meetings.”
“Markets now expect the Bank of Canada to outpace its southern counterpart in raising rates, tightening policy twice more by the end of next year,” said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments.
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