Bank Of Canada Raises Rates Again

Posted on July 20/2010 by

The Bank of Canada raised its benchmark interest rate by 25 basis points Tuesday, the second straight time it has done so after keeping rates at unprecedented lows for more than a year.

In its latest policy decision, the bank opted to move its overnight lending rate to 0.75 per cent. The bank had previously raised its benchmark rate to 0.5 per cent in June after having kept rates at emergency lows since April 2009 in an attempt to stimulate the economy and spur lending.

In raising the rate, the bank moved to lightly hit the brakes on a Canadian economy that has shown signs of significant strength in recent months.

But the bank made it clear in its policy statement that it sees Canada's economy recovering more gradually than it did in its previous outlook in April. It now projects GDP growth of 3.5 per cent in 2010, 2.9 per cent in 2011 and 2.2 per cent in 2012.

The bank also made it clear that future rate hikes are not guaranteed.

"Any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," the bank said in its statement.

Further rate hikes can't be ruled out, BMO economist Michael Gregory noted.

Bank of Canada governor Mark Carney opted to raise interest rates Tuesday, the second consecutive hike after more than a year of record low rates. (Canadian Press)

"The bank's forward-looking language does not preclude further rate hikes," he said. "[But] the bank now has more wiggle room to raise rates … if they want to. And we think they will."

While raising rates, the Bank of Canada clearly took a cautious approach, CIBC economist Avery Shenfeld said in a note.

"The Bank of Canada is like a poker player with a pair of jacks," he said, "not sure if it has the winning hand, but comfortable throwing in another quarter-point chip at each betting opportunity for now."

The overnight lending rate is the rate at which banks borrow from each other for short-term loans. While it is not directly related to the rates banks then offer their customers, they are often closely aligned.

Within hours of the announcement, three of Canada's major lenders — Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and the Royal Bank of Canada — raised their prime lending rates to 2.75 per cent, up from 2.5, effective July 21.

The next scheduled date for the Bank of Canada to announce the overnight rate target is Sept. 8.

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