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article imageBank of Canada raises benchmark interest rate to 1.5 percent

By Karen Graham     Jul 11, 2018 in Business
Ottawa - The Bank of Canada raised its benchmark interest rate Wednesday by 1.5 percent, fully behind an economy that it predicts will remain resilient even as it faces an even bigger bite from deepening trade tensions.
When Stephen Poloz became Governor of the Bank of Canada in 2013, he predicted that Canadian exports would be buoyed by strong global demand and increased investment at home - a prediction that is now becoming a reality.
Today's rate hike is the first in six months, raising the benchmark rate to 1.5 percent from 1.25 percent. This is the bank's fourth rate hike in the past 12 months, reports CTV News.
There has been a lot of speculation over if and when the Band of Canada would raise the interest rate, with some people thinking the bank would be spooked by the tariffs imposed on Canadian goods by the U.S. But Statistics Canada issued a strong jobs report last month, reporting the economy had added 31,800 jobs, on a seasonal-adjusted basis.
Wages also picked up at a solid pace of 3.6% year-over-year. The figures beat economic expectations. This means the central bank's move in raising the benchmark rate will be followed by Canada's other big banks, even as President Donald Trump escalated the U.S. trade war with China, scheduling tens of billions in additional tariffs.
Markets Insider noted that in June, at a meeting, the Bank of Canada left its rate unchanged but dropped a reference to remaining "cautious" on monetary policy.
But dropping the word "cautious" goes along with Bank of Canada’s new Monetary Policy Report that shows most companies are paying attention to their order books rather than focusing on the headlines. And this is good for the economy.
“Canada’s economy continues to operate close to its capacity and the composition of growth is shifting,” the Bank of Canada said in its policy statement. “Exports are being buoyed by strong global demand and higher commodity prices. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors.”
Other things to consider in the long run
The Canadian dollar climbed 0.3 percent versus the U.S. dollar following the announcement. And Canadian businesses are optimistic. The housing market is finally picking up. Construction starts jumped 27.9 percent last month, Canada Mortgage and Housing Corporation said Tuesday, to a seasonally-adjusted 248,138. Economists had expected housing starts to come in at around 210,000.
However, while the trade war between the U.S. and the rest of the world appears to be escalating, U.S. tariffs on the auto sector's integrated cross-border supply chains would have "large impacts on investment and employment," the Bank of Canada warned Wednesday. And remember, the NAFTA deal is stalled for the time being.
But even with the apparent uncertainty of global economics at this time, the Bank of Canada is now predicting slightly stronger growth for Canada over the next couple of years. Real gross domestic product (GDP) is expected to grow 2.2 percent in 2019, up from its April call of 2.1 percent, and by 1.9 percent in 2020, compared with its previous prediction of 1.8 percent. The economy's growth projection for this year remains at two percent, the bank said.
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