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Bank of Canada makes sharp jump in interest rates

13 July 2017

After a number of hints from BoC policymakers in recent weeks that it was moving towards normalising monetary policy, the central bank today voted to raise interest rates from 0.5% to 0.75%.

This was the first rate hike in Canada in the last 10 years but the BOC had signalled it very clearly more than a month back.

GBP/CAD Forecast: Bank of Canada (BOC) Meets on WednesdaySave for potential political developments or changes in oil price, the Pound to Canadian Dollar exchange rate is unlikely to see any major shift in movement until Wednesday's key session. It's the Bank's first increase in seven years.

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However, as Britain's trade deficit widened in May while industrial and manufacturing production contracted, analysts have warned that British business confidence and investment is sliding. While this is a legitimate concern, there is mounting evidence that uncertainty about the outlook is being offset by the need to expand capacity to take advantage of stronger demand today.

Look for a full update on the Bank's economy outlook on October 25th, 2017. The United States, Mexico and Canada are due to start renegotiating the North American Free Trade Agreement (NAFTA) on August 16 and the uncertainty over future trading relations is already weighing on business investment. 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.

Overnight, the Canadian dollar also went up six tenths of a cent. Non-commodity goods exports remain weak, but exports of services have responded as part of the rebalancing of the Canadian economy.

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The increase also signals that nearly a decade of ultra-low interest rates is drawing to a close. A large part of the country's U.S. dollar income comes from the sale of oil and other energy-based goods not only in America but in the rest of the world.

Governing Council acknowledges that the economy may be more sensitive to higher interest rates than in the past, given the accumulation of household debt. Rising employment and wages will support solid household spending going forward. Accordingly, as the gap closes in the months ahead, we expect inflation to head toward 2 per cent, with the rate of convergence determined by how quickly these various temporary factors unwind.

"It's not how I interpret the data, it is how they interpret the data", said senior rates strategist Andrew Kelvin at TD Securities, which had expected the bank to hold rates steady rather than hike because the Consumer Price Index (CPI) had shown subdued inflation.

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This prolonged low-rate environment has created problems as consumers overextended themselves with assets that could potentially render negative equity, as debt based asset purchases can be more volatile as they are essentially leveraged. Technological advances and e-commerce make prices more sensitive to global market conditions and new information.

Bank of Canada makes sharp jump in interest rates