Bank of Canada raises interest rate for 1st time in 7 years to 0.75%

The Bank of Canada has raised its key interest rate as expected to 0.75 per cent — the central bank's first move upward in the cost of borrowing in seven years.

 

The bank's target for the overnight rate — at which major financial institutions make one-day loans to each other — moved up by one-quarter of a percentage point from 0.50 per cent.

 

In a statement accompanying the rate decision, the central bank said the Canadian economy has been robust, fuelled by household spending.

 

"As a result, a significant amount of economic slack has been absorbed," the bank said, adding that the remaining slack is expected to be gone around the end of this year, which is earlier than the bank anticipated in its April  Monetary Policy Report.

 

The move means consumers will likely pay more for borrowing such as variable-rate mortgages and lines of credit.

The interest rate increase had been widely expected after senior Bank of Canada officials signalled in speeches and interviews over the past weeks that lower rates had done their job, and the Canadian economy was performing well.

 

Media conference

The Bank of Canada hadn't increased the overnight rate since August 2010, when it nudged it up to one per cent. After Stephen Poloz took over as governor of the bank, the rate was lowered twice in 2015 to 0.5, where it remained until Wednesday.

 

Poloz and senior deputy governor Carolyn Wilkins will hold a media conference at 11:15 a.m. ET today to discuss the decision and outlook.

 

With the economy performing well, the bank has also nudged up its forecast for growth this year. The bank said real gross domestic product (GDP) is now expected to grow by 2. 8 per cent in 2017, up from the April outlook of 2.6 per cent. 

 

The central bank said growth is expected to moderate over the next two years, coming in at two per cent in 2018 and 1.6 per cent in 2019.

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Today’s Bank of Canada rate hold announcement marks almost four straight years that the key benchmark rate has remained unchanged, since September 8, 2010. Great news if you have a variable-rate mortgage or home equity line of credit; the prime rate stays at 3%.

 

The announcement noted that “the risks to the outlook for inflation remain roughly balanced, while the risks associated with household imbalances have not diminished.” With these considerations, the Bank is maintaining its monetary policy stimulus, and remains neutral with respect to the timing and direction of the next change.

 

The next rate-setting day is October 22nd.

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