Bank Of Canada Hikes Rates To 1.25%; Gold Priced In CAD Jumps



The Bank of Canada raised its benchmark interest rate by 25 basis points to 1.25 percent Wednesday, pointing to sustained growth in the G7 economy and inflation that is closer to the country's target.

The bank rate has an impact what Canadians pay lenders for things like mortgages and personal loans. NAFTA uncertainty hangs over the outlook, with the Bank explicitly downgrading the outlook for business investment and trade to account for the impact of negotiations.

A class-action lawsuit filed in a USA court alleges six Canadian banks and three others conspired to increase the profitability of their derivatives trading business by manipulating an interest rate benchmark for about seven years.

The BoC is expected to raise interest rates in order to cool off personal lending and the red-hot Canadian housing sector.

The bank said that trade uncertainty is expected to cut investment by about 2 percent by the end of 2019, while USA tax reforms will trim another 0.5 percent as firms may decide to redirect spending from Canada to the United States to benefit from lower corporate taxes.

TD Bank, RBC and CIBC have all raised lending rates to customers in anticipation of the move.

"We had thought that the stagnation of the economy net-net since the two rate hikes in Q3 (judging from the monthly GDP readings), signs of softness in house prices in Toronto and Vancouver areas, coupled with the strength of the Canadian dollar and NAFTA uncertainties would have removed any sense of urgency from the central bank", analysts at BBH wrote in a note to clients.

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However, the bank expressed growing concern about the future of the North American Free-Trade Agreement (NAFTA), which will hold its sixth round of talks in Montreal next week. We concur with the Bank's assessment that "some accommodation will likely be needed to keep the economy operating close to potential and inflation on target" and we believe that the Bank will need to slow the pace of rate hikes in 2019 (we now have the overnight rate holding at 2.25%, below the 3.00% mid-point of the Bank's estimated neutral rate range, largely reflecting the impact of higher rates on high household debt).

The central bank has increased the trend-setting rate to 1.25 per cent, up from one per cent. But dark clouds on the trade horizon had many watchers downgrading their expectations.

David Rosenberg, chief economist Gluskin SheffThose who had been forecasting three more moves this year did not receive much reassurance in what was a fairly dovish press statement.

"If we continue to see those NAFTA related uncertainties", Donald said, "and if we see some downsides to the economy from new mortgage rules that came in or from potentially the increase in minimum wages then we'll probably be a Bank of Canada that needs to go more slowly".

"We can't just relax and assume that it would be a small shock", he said.

The Bank of Canada is seen in Ottawa on September 6, 2017.

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