Bank of Canada raises rates, says more hikes to come

The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar.

Canada's economy, on the other hand, continues to face headwinds from increased trade risks, a potential slowdown in the once-hot housing market and an expected slowdown in consumer spending as higher interest rates take hold, Rosenberg said. This is contributing to financial stresses in some emerging market economies.

The country's inflation rate is expected to rise as high as 2.5% - above the 2% mid-point of the bank's target range - due to temporary factors such as higher gasoline prices.

The Canadian Dollar is sharply appreciating vs. its American neighbor on Wednesday, dragging USD/CAD to fresh lows in sub-1.3100 levels. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors.

The central bank said it expects the Canadian economy to expand by 2 per cent per year on average between 2018 and 2020, noting that recently implemented tariffs on steel and aluminium will likely have only "modest" effects on growth and inflation. The economy's growth projection for this year remains at 2%, the bank said.

Canadian government bond prices were mostly lower across a flatter yield curve, with the two-year down 4 cents to yield 1.959 per cent and the 10-year falling 5 cents to yield 2.156 per cent.

Governor Stephen Poloz said trade tensions were the biggest issue on the table.

The bank raised the rate even as it predicts larger impacts from the widening trade uncertainty, particularly after the United States imposed steel and aluminum tariffs on Canada and Ottawa's retaliatory measures.

The Bank of Canada may have widely telegraphed its desire to raise interest rates, but whether Canada needs to raise rates in step with the U.S.is much less clear, said David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates.

For its part, the bank said Wednesday that it's expecting higher interest rates will still be necessary over time to keep inflation near its target.

(Copyright © 2015. All Rights Reserved.)
 
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