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June 7, 2010

Bank of Canada raises overnight rate

On June 1, 2010, the Bank of Canada - to no one's surprise - announced that it is raising its overnight interest rate to 0.50 per cent, up from 0.25 per cent. The increase comes as a result of continued economic growth in Canada, led by housing and consumer spending, and the resumption of growth in employment. The rise indicates a desire to encourage economic growth, while containing inflation. Consumer Price Index (CPI) inflation remains in line with the Bank of Canada's projections for April, and the outlook reflects strong domestic demand, slowing wage growth, and overall excess supply.

As always, we encourage you to refrain from trying to time the markets when it comes to your investments. The best course of action is to remain focused on your long-term financial plan and ensure that your current mix of investments matches the strategic asset allocation appropriate for your financial purposes.


Impact of the rate increase


Mortgage rates/loan rates:
Prime rate and mortgage rates - set by retail banks - should rise over time with the Bank of Canada rate.

Canadian currency:
The Canadian dollar is expected to strengthen in the short term.

Canadian economy:
The economy is expected to slow, down from its 6.1 per cent annualized rate in the first quarter, and household spending is expected to decelerate to a pace more consistent with income growth.

Bond prices:
The impact of an interest rate increase is already indirectly priced into bond prices.

Bank of Canada press release