Bank of Canada hikes interest rate to 1.25%

The Bank of Canada raised its overnight interest rate to 1.25% on Wednesday – its highest level in nearly a decade.

The 25-basis-point increase was widely expected and was preceded by Canada's major banks all raising mortgage interest rates between 15 and 20 basis points on average.

The bank cited strong employment growth as a contributing factor to stronger-than-anticipated consumption and residential investment. It also noted that business investment has continued to climb at a solid pace, while Canadian exports have been weaker than expected. 

Looking ahead, the bank forecasts that Canada's economy will grow beyond potential in 2018's first quarter, before tempering. Real GDP for the year is pegged at 2.2% growth, down from an estimated 3% growth in 2017.

Additionally, the bank remarked that uncertainty around the future of the North American Free Trade Agreement is weighing increasingly on the country's economic outlook. The bank's monetary policy report, also released January 17, anticipates trade-policy uncertainty to reduce the level of business investment by around 2% by the end of 2019.

Today marked the third time the Bank of Canada has raised its overnight rate in less than a year. Increases of 25 basis points were made back-to-back in July and September of last year, followed by two decisions to hold the rate.  

hwoodin@biv.com 

@hayleywoodin