nsucurrent.com February 20, 2018

Canadian banks expect to benefit from Bank of Canada rate hike

07 September 2017, 01:54 | Colleen Roy

EDITORIAL: Debt levels a concern

A new subdivision rises in Kleinburg Ont. this year. A rate rise this week would likely make floating-rate mortgages rise almost immediately though stress test rules may blunt the effect on the wider market

The Bank of Canada again raised its key rate by 25 basis points on Wednesday, making it switch to 1 %. Then, it was the first increase in the key rate since 2010. It is the only major central bank besides the U.S. Federal Reserve that has been raising rates.

In its accompanying statement, the central bank stated its decision was supported by the bank's view that Canada is "becoming more broadly-based and self-sustaining".

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. It also cited more "widespread strength" in business investment and exports, and "stronger-than- expected indicators of growth" globally.

- The Bank of Canada raised the overnight lending rate to 1.00% from the previous 0.75%.

The local stock market turned negative as investors retreated from rate-sensitive sectors including telecoms and utilities, which typically issue debt to pay for projects and pay out dividends that become less attractive when government bond yields rise.

CIBC economist Avery Shenfeld argued that the timetable for the hike is much tighter, as the BoC could be expected to increase rates this week.

The Canadian dollar gained more than a penny in reaction to the news on Wednesday, and was changing hands at 82 US cents, the highest level since June 2015.

"While we do expect growth to simmer down somewhat in the second half of the year, we would readily allow that all of the economic surprises have been to the high side in 2017", BMO Financial Group chief economist Douglas Porter told the Financial Post.

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

On Bay Street, the Toronto Stock Exchange's S&P/TSX composite index slipped 5.82 points to 15,084.33, after 90 minutes of trading, but it had been positive before the bank's 10 a.m. ET rate announcement.

The Bank of Canada said there remains "significant geopolitical risks and uncertainties" around global trade and fiscal policies that have weakened the U.S. dollar. There was no Monetary Policy Report or news conference to explain a move higher.

The bank, for its part, did make mention of the soaring loonie - pointing to the weaker USA dollar and the strengthening Canadian economy.

Future rate decisions, the bank said, would continue to be guided by economic data and financial market developments. It noted, however, that upward pressure on wages and prices remain more subdued than historical trends would suggest, which has also been seen in other advanced economies.

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