OTTAWA (Reuters) - The Bank of Canada raised interest rates for the first time in nearly seven years on Wednesday, saying the economy no longer needed as much stimulus and sending the Canadian dollar to a near 11-month high on expectations of more rate hikes to come.
The widely expected rate increase makes Canada the first major central bank to follow the Federal Reserve in removing some of the monetary stimulus poured into the global economy after the 2007-2009 financial crisis.
Economists said the central bank’s statement suggested at least one more quarter-percentage point rate increase is in store for 2017, with more likely to follow gradually if growth continues to meet expectations.
The central bank cited a need to look through soft inflation as it hiked rates for the first time since September 2010 but said it will wait for more economic data before committing to its next move.
“There is an upward revision to our outlook of course because of the data ... but more importantly it’s our confidence that has increased through those months compared to where we were at the beginning of the year,” Bank of Canada Governor Stephen Poloz said at a news conference.
“It’s that confidence in the outlook that makes us more confident today, to make the change we’ve made.”
The increase, which pushed the official interest rate up to a still-low 0.75 percent, boosted the Canadian dollar to a near 11-month high and sent yields on Canada’s two-year bonds to their highest since September 2014.
A Reuters poll of economists on Tuesday showed a sharp shift in sentiment in the week leading up to the rate decision, with many bringing their rate hike expectations forward based on hawkish comments from policymakers. [CA/POLL]
“I thought the Bank of Canada did a masterful job today,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
“They raised rates and they stopped short of promising another rate hike this year but they were broadly bullish on the economy which bodes well for another rate increase this year.”
Years of ultra-low interest rates since the financial crisis spurred a borrowing binge and helped drive Canadian household debt to record levels in recent years, fueling a housing boom that has recently began to falter.
The bank said in its accompanying monetary policy report that activity in the housing sector has abated, largely due to sharp declines in resales in Toronto and surrounding areas.
The central bank has repeatedly warned about the vulnerabilities posed by the massive consumer debt but was forced to cut interest rates twice in 2015 as oil prices dropped, sideswiping Canada’s energy-dependent economy.
In a decision that emphasized the lag between a rate hike and future inflation, the bank signaled it did not want to commit to a predetermined path of more hikes.
Acknowledging the contradiction in raising rates when inflation is low, the bank said it will analyze short-term price fluctuations “to determine the extent to which it remains appropriate to look through them,” and noted temporary factors like electricity rebates have kept a lid on prices.
Additional reporting by Solarina Ho, Fergal Smith in Toronto, Dion Rabouin and Jennifer Ablan in New York; Editing by Meredith Mazzilli