TURN­ING TIDE

Bank of Canada hikes in­ter­est rates for the first time in seven years

The Guardian (Charlottetown) - - FRONT PAGE - BY CRAIG WONG

The Bank of Canada has hiked its bench­mark in­ter­est rate to 0.75 per cent from 0.5 per cent, its first in­crease in nearly seven years, amid ex­pec­ta­tions of stronger eco­nomic growth this year.

Such a move is bound to in­crease the costs of mort­gages, home eq­uity lines of credit and other loans linked to the big bank prime rates.

The Bank of Canada cut in­ter­est rates by a quar­ter of a per­cent­age point twice in 2015 to help the econ­omy deal with a plunge in oil prices, but gover­nor Stephen Poloz said Wed­nes­day that ad­just­ment has been made.

“The econ­omy can han­dle very well this move we have to­day and of course you need to preface that with an ac­knowl­edg­ment that of course in­ter­est rates are still very low,” Poloz told a news con­fer­ence in Ot­tawa.

“Peo­ple need to un­der­stand that in the full course of time I don’t doubt that in­ter­est rates will move higher, but there’s no pre­de­ter­mined path in mind at this stage.”

He said any fu­ture changes to the cen­tral bank’s key in­ter­est rate will de­pend on eco­nomic data in the months ahead.

Eco­nomic growth is broad­en­ing across in­dus­tries and re­gions, and there­fore be­com­ing more sus­tain­able, the bank said, with both the goods and ser­vices sec­tors ex­pand­ing.

Bank of Mon­treal chief econ­o­mist Doug Porter said he ex­pects the next rate hike will oc­cur in Oc­to­ber, but wouldn’t rule out such a move at the cen­tral bank’s next sched­uled an­nounce­ment on Sept. 6.

“And so the tide be­gins to turn,” Porter wrote in a brief note to clients. “The over­all tone of the state­ment and the bank’s up­dated fore­cast are on the up­beat side of ex­pec­ta­tions.”

In its out­look for the Cana­dian econ­omy, the Bank of Canada es­ti­mated growth to be 2.8 per cent this year, 2.0 per cent next year and 1.6 per cent in 2019. That com­pared with its April fore­cast for growth of 2.6 per cent this year, 1.9 per cent next year and 1.8 per cent in 2019.

The rate in­crease, the first since Septem­ber 2010, was widely ex­pected by economists fol­low­ing “hawk­ish” com­ments by Poloz and se­nior deputy gover­nor Carolyn Wilkins in re­cent weeks.

The hike comes as in­fla­tion re­mains be­low the bank’s two per cent tar­get. But it said it be­lieves the re­cent soft­ness is tem­po­rary, with the ef­fects of food price com­pe­ti­tion, elec­tric­ity re­bates in On­tario and changes in au­to­mo­bile pric­ing ex­pected to fade.

The bank ex­pects in­fla­tion to ease fur­ther this year due in part to On­tario elec­tric­ity re­bates, but re­turn close to two per cent by the mid­dle of next year.

The Bank of Canada said it also an­tic­i­pates ex­ports to pick up in the com­ing quar­ters and make an in­creas­ing con­tri­bu­tion to growth, while busi­ness in­vest­ment is also ex­pected to rise.

CP PHOTO/FRED CHAR­TRAND

Stephen Poloz, Gover­nor of the Bank of Canada, holds a news con­fer­ence con­cern­ing the rise of the bank’s in­ter­est rates in Ot­tawa.

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