Published: Wed, July 11, 2018
Markets | By Otis Pena

Bank of Canada raises interest rate for first time in 6 months


Governor Stephen Poloz said that while it was not easy for policymakers to set aside "all the talk" about trade, the bank hiked rates amid increasing confidence in its outlook, with Canada's economy firing on all cylinders despite the tensions.

The Bank expects the global economy to grow by about 3 ¾ per cent in 2018 and 3 ½ per cent in 2019, in line with the April Monetary Policy Report (MPR).

The decision will likely prompt Canada's big banks to raise their prime rates, thereby passing on the rate increase along to their customers.

Scott Hannah says higher interest rates have also helped to cool down the country's real estate markets, helping future homeowners.

"Although there will be hard adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest", the bank said in a statement.

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CPI and the Bank's core measures of inflation remain near 2 per cent, consistent with an economy operating close to capacity.

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.

Poloz recently said the impacts of the U.S.

The central bank says Canadian growth will continue to see bigger contributions from exports and business investment, while it expects household spending to represent a smaller share due to the dampening effects of higher interest rates and stricter mortgage rules. The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack. Inflation ran at a 2.2-per-cent pace in May, slightly above the Bank's target of 2 per cent.

Poloz has followed a cautious, data-dependent approach in recent months and he hasn't touched the rate since raising it in January, a move that came after two earlier increases in the second half of 2017.

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