The Bank of Canada has raised its interest rate for the second time in less than two months in an effort to adjust to the unexpected force of the country’s economic momentum.
Wednesday’s hike of its overnight lending rate to 1.0 per cent marks its second quarter-point increase since July, and comes less than a week after the latest data for economic growth showed an impressive expansion of 4.5 per cent for Canada in the second quarter.
That April-to-June performance followed surprisingly healthy growth in the first three months of 2017 and easily exceeded the Bank of Canada’s projections.
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“Recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly-based and self-sustaining,” the bank said in a statement that accompanied the announcement.
The bank said solid employment and wage growth have led to strong consumer spending, while the key areas of business investment and exports have also showed improvements.
The loonie soared on the news, jumping more than a cent to over 82 cents US, up from Tuesday’s average price of 80.83 cents US. The dollar is now up about three per cent over the past month and up 14 per cent from its low of roughly 73 cents in April.
In making what many described as a “hawkish” move, the bank made a point of also highlighting potential negatives in the brief, 400-word statement.
The bank underlined concerns around geopolitical risks and uncertainties related to international trade and fiscal policies. It also predicted the rapid pace of economic growth to moderate in the second half of the year
Looking ahead, the bank insisted future rate decisions would not be “predetermined” and will be guided by upcoming economic data releases and financial market developments.
It pledged to pay particular attention paid to the economy’s potential, job-market conditions and any potential risks for Canadians from the higher costs of borrowing.
“Given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates,” the statement said.
TD senior economist Brian DePratto said the bank’s downside warnings and its assertion that future rate decisions aren’t already mapped out were attempts to dial down the market impacts of Wednesday’s move.
Analysts widely anticipated a second rate hike in the coming months, but the timing of Wednesday’s move came sooner than most had predicted and likely came as a surprise for some. Ahead of Wednesday’s decision, most experts had expected the bank to wait until its next scheduled rate announcement in late October.
“Clearly, the Bank of Canada is trying to get ahead of things,” DePratto said.
“They could have waited the six weeks for a little more fulsome communication… They felt the data coming in was strong enough to warrant a move right away.”
The question now is: where does governor Stephen Poloz go from here?
Some economists highlighted a line in Wednesday’s statement that said the increase removed some of the “considerable” monetary policy stimulus already in place. They took it as a clue another hike could be on the way.
“Certainly, I think today’s statement puts a little more weight on the argument that you could see another increase sooner rather than later and certainly sooner than us and, I think, markets were expecting as recently as two weeks ago,” DePratto said.
But in trying to predict the future, there’s a range of factors to consider, CIBC’s Andrew Grantham said in a research note to clients.
“If the economy cools down from its current blistering pace as we expect in (the third quarter), the Bank of Canada will have reason to take a slower approach in rate hikes,” he wrote.
Before making another move, Grantham expects Poloz to wait and see whether the U.S. Federal Reserve hikes its interest rate in December. That meeting, he added, will come a week after the Bank of Canada’s December rate announcement.
In its statement, the bank also said headline and core inflation have seen slight increases since July, largely as expected. It noted, however, that upward pressure on wages and prices remain more subdued than historical trends would suggest, which has also been seen in other advanced economies.
The rate increase means Poloz has now reversed the two cuts he introduced in 2015 to help the economy deal with the plunge in oil prices. The bank said Wednesday the increasingly robust economy shows it no longer needs as much stimulus.
Some analysts predicted the bank would refrain from moving the rate out of concern such a move would drive up an already strengthening Canadian dollar and pose a risk to exporters.
Following a quiet August for bank officials, others believed the bank would hold off because it hadn’t clearly telegraphed a September hike.
The bank’s communications approach in the lead-up to Wednesday’s decision differed from its strategy in the weeks before the July hike, which saw officials, including Poloz, use public statements to suggest a rate move was on the way.
