Canada central bank ups key lending rate to 1.0pc

Stephen Poloz Bank of Canada

The Bank of Canada is raising its target for the overnight rate to 1 per cent.

Interestingly, the BoC did also reference elevated household indebtedness and the impact that these rate rises could have on it. CAD gains can not be unlimited if Oil does not to some extent support the bullish sentiment as the Bank of Canada is still very sensitive to the broader picture for Crude Oil.

The bank's rate has returned to where it was at the start of 2015, when the central bank started slashing rates to stimulate a Canadian economy that had been waylaid by the oil price crash.

Coming into Wednesday, only a select group of economists and analysts thought the Bank of Canada would hike rates.

The markets weren't anticipating an interest rate hike quite yet. The Bank of Canada has distinguished itself as the only central bank willing to raise borrowing costs before inflation has even reared its head, said Shaun Osborne, chief FX strategist at Scotiabank. At its previous meeting in July, the BoC raised its key rate for the first time in seven years, also by 25 basis points.

Going forward, the central bank said it expects a moderation in the pace of economic growth in the second half of 2017, but already gross domestic product (GDP) is higher than it had forecast. "That was possible when housing prices were rising rapidly and interest rates were at record lows".

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Unfortunately, the central bank did not release a monetary policy report which is consistent with their quarterly release at every other interest rate announcements.

Canada's currency climbed as much as 1.8 per cent after the decision, reaching $C1.2146 against its U.S. counterpart, the highest intraday level since June 2015, and extending the gain this year to 10 per cent.

As Canada celebrates its 150th birthday, the economy is strengthening.

On Wednesday, RBC, Toronto-Dominion Bank (TSX:TD), Bank of Montreal (TSX:BMO), Canadian Imperial Bank of Commerce (TSX:CM) and Bank of Nova Scotia (TSX:BNS) moved to increase their prime lending rate by 25 basis points from 2.95 per cent to 3.2 per cent, effective Thursday.

"The Bank has said that future increases will not be "predetermined", which aims perhaps to indicate to the markets that they will not increase the rate a quarter point at each meeting, " wrote CIBC in a note to its clients.

But there remains uncertainty over continental free trade talks with the United States and Mexico, and hurricanes pounding the heart of the U.S. refining capacity in the Gulf coast region - given that Canada exports most of its oil to its southern neighbor. Nonetheless, there remains some excess capacity in Canada's labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.

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