Bank of Canada Raises Key Interest Rate To 1.50%

Stephen Poloz. iPolitics  Matthew Usherwood

Stephen Poloz. iPolitics Matthew Usherwood

The increase will raise the cost of borrowing for customers with loans linked to the prime rate such as variable rate mortgages and lines of credit.

This is the first rate hike in six months and the fourth since last summer. -Canada trade dispute would figure prominently in the bank's decision-making process for today's rate announcement.

Poloz made the call even though he warned the economy should brace for larger impacts from mounting trade uncertainty. In particular, the trade impacts were caused by the Trump administration's recent steel and aluminum tariffs on Canada and, in response, Ottawa's retaliatory duties on USA imports.

The bank's relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in almost four weeks, and economists said they expected the central bank to hike again by year end.

Overall, it still expects average growth of close to 2% over 2018-2020.

With two daughters off school over summer, finding affordable activities is key for Florence van Dijk, especially following news of yet another interest rate hike.

But in addition to steel and aluminum tariffs, Canada is facing a significant trade-related unknown that many believe would inflict far more damage on the economy: US duties on the automotive sector.

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"Governor Poloz did note the risk of a far greater shock to the economy should we see more tariffs (autos in particular) but suggested that they "can't make policy based on hypotheticals".

Another hike this week would come with Canada facing a number of trade-related uncertainties, including NAFTA talks, USA steel and aluminum tariffs and the threat of more duties on the economically critical automotive sector.

"We need to base our decision on what we actually know", he said.

The Bank of Canada also has its eye on how widening global trade disputes, including an intensifying battle between the US and China, will affect the world's economy. It warns that "escalating trade tensions pose considerable risks to the outlook" at the global level.

Economists anticipate several more hikes this year and in 2019.

So what does the rate hike mean for Canadians? The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack.

Scott Hannah says higher interest rates have also helped to cool down the country's real estate markets, helping future homeowners. The increase also comes as the Bank looks to fight rising inflation which has risen above its 2 per cent target.

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