Sunday, 19 November, 2017

Bank of Canada leapfrogs Fed, other central banks on rate hikes

As Canada celebrates its 150th birthday the economy is strengthening As Canada celebrates its 150th birthday the economy is strengthening
Wilma Wheeler | 07 September, 2017, 01:48

The currency had been in the red before the central bank said its key rate will rise by one-quarter point to 1.0 per cent.

That figure could "increase to upwards of $300 million in year five as it takes a while to blend into the portfolio, as we roll off assets, and we refinance assets at the higher rate..."

Canada's annualized growth rate of 4.5 per cent in the second quarter led all G7 countries.

There appears to be a good deal of investors who are hopeful that this upcoming meeting will provide some further confirmation that the hawkish bias is real and the central bank is intending to tighten policy beyond more than just removing the insurance cuts put in place at the height of the oil crash.

The Bank of Canada is once again raising its benchmark interest rate as it sees the economy's powerful performance pointing to broader, more self-sustaining growth. The pace has dramatically raised the odds of a hike in September up to 50 per cent, according to September 1 overnight index swaps market data.

"Given today's abrupt hike, with no prior communication since the previous meeting, and the bank's seeming care-free stance on the soaring Canadian dollar, we can't rule out anything in coming meetings", BMO Capital Markets Chief Economist Doug Porter wrote in a note to clients. On July 12, the bank raised rates for the first time in nearly seven years.

Quarterly growth has averaged 3.7 percent over the past four quarters, compared to 2.2 percent in the U.S. Economists are now projecting growth of above 3 percent in Canada for all of 2017, a full percentage point above the U.S. The surge may have already brought the country to full capacity more quickly than the central bank estimated only two months ago.

TD CEO Bharat Masrani told the conference that rising interest rates are a "positive phenomenon" for the financial institution. The next announcement is slated for October 25th, when the bank will also release its latest Monetary Policy Report. 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.

"We have advanced our call for an additional 25bps tightening in the Overnight Rate to this week as a result but it would be fair to say that some (quite significant) doubts about the timing of a rate tightening remain-for numerous uncertainties noted above". In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada's economy.

Future rate decisions, the bank said, would continue to be guided by economic data and financial market developments.

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