GDP growth rate drastically raises odds of interest rate hike

Laura Christensen
September 7, 2017

Policy makers raised their benchmark rate for a second time in since July, by 25 basis points to 1 per cent.

The decision "implies that absent a significant shock, Wednesday's rate increase will be part of a larger and longer march towards interest-rate normalization", said Brian DePratto, TD Bank economist.

"While we can't rule out another rate hike before the end of this year, we should note that the economy is still overly dependent on the heavily indebted household sector to support economic growth", said David Madani, senior Canada economist at Capital Economics, in emailed comments.

The Bank of Canada has done it again.

The rate increase means governor Stephen Poloz has now reversed the two cuts he introduced in 2015 to help the economy deal with the plunge in oil prices.

In a statement, the Bank of Canada noted that consumer spending remains robust, "underpinned by continued solid employment and income growth".

Canada's biggest banks are poised to benefit from a surprise interest rate hike on Wednesday, with Royal Bank of Canada's (TSX:RBC) chief executive pegging the revenue bump at upwards of $300 million over five years.

Governor Stephen Poloz is trying to strike a balance between bringing interest rates back to more normal levels amid the strongest growth spurt in more than a decade, without harming an economy that is only now beginning to fully recover from an nearly decade-long downturn.

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News of Canada's strong second quarter GDP performance also strengthened the loonie against the US greenback. The Canadian Dollar also surged to a 2 year high against its US Dollar counterpart following the announcement of the BoC's decision to raise rates, the exchange rate dropped almost 3 cents in a matter of seconds.

Overall, the council judged that some further removal of considerable monetary policy stimulus is warranted.

Unfortunately, the central bank did not release a monetary policy report which is consistent with their quarterly release at every other interest rate announcements. This has taken a toll on the United States dollar against the Canadian Dollar.

The Canadian dollar, meanwhile, climbed more than 10 percent since May to about 81 cents US.

Future rate decisions, the bank said, would continue to be guided by economic data and financial market developments.

Even with the recent economic improvements, the bank still underlined concerns around geopolitical risks and uncertainties related to global trade and fiscal policies.

"Particular focus will be given to the evolution of the economy's potential, and to labour market conditions".

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