Ex­pect more rate hikes; econ­omy strong

The Hamilton Spectator - - FRONT PAGE - CRAIG WONG

OT­TAWA — The Bank of Canada hiked its bench­mark in­ter­est rate Wed­nes­day for the first time in nearly seven years in what may be the be­gin­ning of the end of the era of cheap bor­row­ing that has fu­elled the hot hous­ing mar­ket and record levels of debt.

The in­crease should come as a lit­tle good news for savers, who have had to en­dure years of ex­tremely low in­ter­est rates in their sav­ings and re­tire­ment ac­counts.

The cen­tral bank raised its key in­ter­est rate tar­get to 0.75 per cent from 0.5 per cent, the first in­crease since Septem­ber 2010, amid ris­ing con­fi­dence the econ­omy has turned the cor­ner and ex­pec­ta­tions of stronger growth ahead.

“The econ­omy can han­dle very well

this move we have today,” gover­nor Stephen Poloz told a news con­fer­ence in Ot­tawa.

He cited the cen­tral bank’s “bol­stered con­fi­dence” in the coun­try’s eco­nomic out­look, in­clud­ing brighter prospects for ex­ports and busi­ness in­vest­ment, com­pared to the be­gin­ning of the year.

The Cana­dian dol­lar soared to a level not seen in nearly a year in re­sponse to the rate hike. The loonie was trad­ing at an av­er­age price of 78.16 cents US, up 0.76 of a U.S. cent. The last time it closed above 78 cents US was in Au­gust 2016.

The Bank of Canada cut in­ter­est rates by a quar­ter of a per­cent­age point twice in 2015 to help the econ­omy deal with the plunge in oil prices. But Poloz said the econ­omy no longer needs as much stim­u­lus.

The hike, while in­cre­men­tal, prompted the coun­try’s big banks to raise their prime rates, which are used as a bench­mark for vari­able rate mort­gages, home eq­uity lines of credit and other loans.

Royal Bank of Canada, the Bank of Mon­treal, TD Bank, Sco­tia­bank and CIBC all an­nounced Wed­nes­day they are in­creas­ing their prime rates to 2.95 per cent from 2.7 per cent, ef­fec­tive Thurs­day.

Even with the in­crease, in­ter­est rates re­main low from a his­tor­i­cal per­spec­tive and Poloz said Cana­di­ans should be pre­pared that rates will rise fur­ther at some point in the fu­ture.

“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.

Sco­tia­bank chief economist JeanFran­cois Per­rault said he ex­pects Wed­nes­day’s an­nounce­ment marks the start of a grad­ual cy­cle of rate hikes.

Per­rault said he’s watch­ing care­fully to see if ex­ports and busi­ness in­vest­ment de­liver as the Bank of Canada is pre­dict­ing.

“The key thing to the fore­cast is a pickup in in­vest­ment and a pickup in ex­port growth be­cause the house­hold side has been do­ing too much of the heavy lift­ing,” he said.

“If that were to con­tinue, I think that speaks very favourably for growth prospects go­ing for­ward and kind of a con­tin­ued grad­ual pace of in­creases from the bank.”

Se­nior deputy gover­nor Carolyn Wilkins said the cen­tral bank was cau­tious in the spring be­cause it has been dis­ap­pointed be­fore when eco­nomic data has failed to live up to ex­pec­ta­tions.

But she said the data since May — in­clud­ing pos­i­tive mo­men­tum in jobs and ex­ports as well as a broad­en­ing of growth across in­dus­tries and re­gions — has helped in­stil con­fi­dence.

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 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 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 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.

Con­sumer spend­ing is ex­pected to con­tinue to be a sig­nif­i­cant con­trib­u­tor to the econ­omy.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.