For the second time in less than two months, the Bank of Canada has raised interest rates.
On Wednesday, the central bank raised its overnight lending rate by a quarter per cent to 1 per cent.
The move surprised many who weren’t expecting a rate increase until later this Autumn.
Just like last time, the rationale behind higher rates was centred around the Bank of Canada’s belief that the economy is growing faster than expected.
Bank of Canada Governor Stephen Poloz said, “The level of GDP growth is now higher than the bank expected.”
Of course, this assumes that GDP measures anything.
The Canadian loonie surged after the announcement, climbing to 82 cents U.S.
The decision reinforces the message that easy money and low-interest rates are coming to an end. Of course, the bursting of Canada’s real estate bubble could reverse direction for the bank, using these recent rate gains as leverage to cut rates in order to “stimulate” the deflating economy.
But until then, analysts are expecting more rate hikes since many have confused consumer indebtedness and rising prices as economic strength.
The Bank of Canada won’t confirm these predictions since, according to the central bank’s statement, price controls on interest rates are, “predetermined and will be guided by incoming economic data and financial market developments.”
Of course, the Bank of Canada isn’t clueless when it comes to higher rates and indebted Canadian households. In the rate hike statement, the bank promised that “close attention will be paid to the sensitivity of the economy to higher interest rates,” given “elevated household indebtedness.”
The bank’s next scheduled rate-setting is Oct. 25.
All in all, today’s announcement puts interest rates back to where they were in January 2015, before Poloz made two surprising “emergency rate cuts” to deal with falling oil prices.
