‘The tide begins to turn,’ as central bank hikes rate for first time in 7 years

Stephen S. Poloz, Governor of the Bank of Canada. (Photo: Bank of Canada – Banque du Canada/Flickr)

OTTAWA—The Bank of Canada has hiked its benchmark interest rate to 0.75 per cent from 0.5 per cent, its first increase in nearly seven years, amid expectations of stronger economic growth this year.

Such a move is bound to increase the costs of mortgages, home equity lines of credit and other loans linked to the big bank prime rates.

The Bank of Canada cut interest rates by a quarter of a percentage point twice in 2015 to help the economy deal with a plunge in oil prices, but governor Stephen Poloz said Wednesday that adjustment has been made.

“The economy can handle very well this move we have today and of course you need to preface that with an acknowledgment that of course interest rates are still very low,” Poloz told a news conference in Ottawa.

“People need to understand that in the full course of time I don’t doubt that interest rates will move higher, but there’s no predetermined path in mind at this stage.”

He said any future changes to the central bank’s key interest rate will depend on economic data in the months ahead.

Economic growth is broadening across industries and regions, and therefore becoming more sustainable, the bank said, with both the goods and services sectors expanding.

Bank of Montreal chief economist Doug Porter said he expects the next rate hike will occur in October, but wouldn’t rule out such a move at the central bank’s next scheduled announcement on Sept. 6.

“And so the tide begins to turn,” Porter wrote in a brief note to clients. “The overall tone of the statement and the bank’s updated forecast are on the upbeat side of expectations.

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In its outlook for the Canadian economy, the Bank of Canada estimated growth to be 2.8 per cent this year, 2.0 per cent next year and 1.6 per cent in 2019. That compared with its April forecast for growth of 2.6 per cent this year, 1.9 per cent next year and 1.8 per cent in 2019.

The rate increase, the first since September 2010, was widely expected by economists following “hawkish” comments by Poloz and senior deputy governor Carolyn Wilkins in recent weeks.

The hike comes as inflation remains below the bank’s two per cent target. But it said it believes the recent softness is temporary, with the effects of food price competition, electricity rebates in Ontario and changes in automobile pricing expected to fade. The bank expects inflation to ease further this year due in part to Ontario electricity rebates, but return close to two per cent by the middle of next year.

The Bank of Canada said it also anticipates exports to pick up in the coming quarters and make an increasing contribution to growth, while business investment is also expected to rise.

Consumer spending is expected to continue to be a significant contributor to the economy, but the bank said it believes high levels of household debt and a slowdown in the housing market will weigh on spending.

The announcement follows signs that the housing market, a key economic driver in recent years, is adapting to government changes meant to cool the real estate sectors of Toronto and Vancouver and help improve financial stability.

“Looking ahead, residential investment is anticipated to contribute less to overall growth,” the bank said. “Macroprudential and housing policy measures, as well as higher longer-term borrowing costs resulting from the projected gradual rise in global long-term yields, are all expected to weigh on housing expenditures.”