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 user 2013-06-22 at 10:16:25 am Views: 82
  • #2086

    Bank raises benchmark ratE

    The Bank Of Canada raised its target interest rate Wednesday for the first time in more than a year, and economists say history — and Canada's current economic climate — suggest more increases are on the way in the months ahead.

    The bank raised its key target for the overnight rate to 2.25 per cent from 2 per cent.

    "With the economy operating close to its capacity, monetary stimulus needs to be reduced to avoid a buildup in inflationary pressures," the central bank said, announcing the move.

    Since July's monetary policy update, the bank said, the Canadian economy has grown faster than originally expected, driven by surging demand for Canadian exports. At the same time, inflationary pressures have also mounted, largely because of high oil prices.

    "Looking forward, the bank expects aggregate demand to grow at, or marginally above, the rate of growth of production capacity," the bank said.

    The overnight target rate is the central bank's key monetary policy tool, telling major financial institutions the average interest rate that the Bank of Canada wants them to charge each other on overnight loans.

    A change in the target for the overnight rate typically triggers a corresponding move by major banks in their prime lending rates. Royal Bank of Canada was the first out of the gate Wednesday, announcing it will raise its prime lending rate to 4 per cent from 3.75 per cent in the wake of the Bank of Canada's decision.

    Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Bank of Nova Scotia, National Bank of Canada and Bank of Montreal quickly followed suit.

    Despite a generally positive view of Canada's economic prospects, the central bank also noted that some uncertainties — in the form of oil prices, future export and import growth and the estimated size of the output gap, which measures the difference between what an economy is capable of producing and what it actually produces — still exist.

    "The bank will continue to pay attention to these factors as it assesses the evolving prospects for pressures on capacity and inflation," the bank said.

    Some economists were slightly surprised by the tone of caution in the bank's statement, but most still expect rates to continue to climb as the year progresses, barring any unforeseen economic shortfalls.

    "There's a measure of caution in the press release that is being reflected right now in the way the market is trading," RBC assistant chief economist John Anania said in an interview.

    "If you look at the Canadian dollar, it's softened up on the back of this thing a bit."

    After gaining three-quarters of a cent on Tuesday, the loonie closed at 77.47 cents (U.S.) Wednesday, down 0.22 of a cent. 

    Still, Mr. Anania also said there's little doubt about the future direction of interest rates in Canada.

    "I think the bank is very clear here, that the tightening cycle has begun," he said. "It's going to be very careful, it's going to look at the data, but unless it gets surprised on the way out, we can export more increases from here on in — I would say in October and in December as well."

    The bank, which cut rates earlier this year to stimulate the economy, last increased borrowing costs in April, 2003.

    Until recently, economists had been split on whether the central bank would deliver its first rate hike in Wednesday's announcement or wait until its October sitting.

    But recent data — including improved overall economic growth and rising inflation — convinced most that a Wednesday move was the most likely outcome, given that the bank's key rate had been sitting at its lowest level in more than four decades.

    At 2 per cent, the bank's target for the overnight rate was just 10 basis points above the 1.9 per cent annual rate of core inflation, well below the historic average, BMO Nesbitt Burns senior economist Douglas Porter said. (A basis point is 1/100th of a percentage point.)

    By comparison, in the mid 1990s, he noted, the average spread was more than 200 basis points.

    He also said history suggests another move is likely in the bank's Oct. 19 decision, noting that since moving to a system of fixed-date policy announcements in November, 2000, the bank's moves have always come in pairs or more.

    "That is, there have been no stand-alone rate hikes-cuts," he said.

    "In other words, we should probably start with the assumption that the bank plans to hike again on Oct. 19, and would need to be convinced not to go."

    In the United States, economists expect the Federal Reserve's Federal Open Market Committee to raise rates again at its next meeting late this month. The Fed has already raised interest rates twice this year.

    Speaking in Washington Wednesday, Fed chairman Alan Greenspan said the U.S. economy, after a slow period earlier in the summer, appears to have regained some traction.


    * Post was edited: 2004-09-10 10:54:00