26 October, 2018

Bank of Canada Raises Interest Rates

Bank of Canada Raises Interest Rates

As expected and widely anticipated by markets, the Bank of Canada raised its key lending rate by 25 bp to 1.75%. Although the rate of inflation slowed slightly in September, the Canadian economy has been turning in solid numbers this year when it comes to economic growth. This is the third increase this year.

In general, the Central Bank is attempting to monitor and control inflationary pressures, while balancing growth and employment. They would also like to return historically very low borrowing costs to ‘more normal’ levels. Recent data suggests our economy is coping with gradually higher rates. The increase also puts the Bank Canada in alignment with the U.S. Federal Reserve, which has raised rates three times this year based on strength in the U.S. economy.

The Bank of Canada indicates they plan to proceed only gradually with rate increases, given that there are still significant risks to Canada’s economic outlook, including the effect of trade tensions and the impact that higher interest rates have on households and corporations. The change may likely result in an increase in Prime Rate to 3.95%.

From the BOC release:

  • “The Canadian economy continues to operate close to its potential and the composition of growth is more balanced.”
  • “Household spending is expected to continue growing at a healthy pace, underpinned by solid employment income growth.”
  • “In determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook.”