BoC raises rates to 1.5%, second increase this year

Bank may have unrealistic growth expectations: economist

The Bank of Canada (BoC) has raised its overnight interest rate for the second time this year, increasing it by 25 points to 1.5%. The increase was widely expected after the BoC held rates constant at 1.25% since January in response to rising global trade tensions.

After holding rates steady in March, Bank of Canada deputy governor Timothy Lane said that the Bank was taking a wait and see approach considering rising global trade tensions and NAFTA concerns.

Despite increasing the overnight rate, the Bank is still signalling its concern about growing protectionist sentiments.

“The possibility of more trade protectionism is the most important threat for global prospects,” said the BoC announcement.

CIBC economist Avery Shenfeld expects future rate hikes will continue to be slowly implemented over the course of the coming years. He noted that it took the Bank half of a year to raise rates and that it will likely take them another half year to do it again. He told investors that a strong second quarter characterized by job gains and growth encouraged the BoC to raise rates after holding them steady in April and May.

“What’s key to the rate hike outlook ahead is the extent to which Canada can hit that 2% growth target in the face of future interest rate hikes,” said Shenfeld in a note to investors.

However, Shenfeld notes that a stabilizing housing market and decreased government spending means that the country’s GDP growth will be more reliant on exports and business investment.

The BoC is optimistic that strong global demand coupled with tighten capacity will offset these declines in growth. However, CIBC economists are more sceptical that businesses will add the needed capacity.

The BoC recognizes that this will not be an easy task. In its statement, the Bank recognized that some businesses and industries will have to make difficult adjustments. However, the BoC says that these adjustment will only have a modest affect on growth and inflation.