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September 8, 2010

Bank of Canada raises overnight rate

On September 8, 2010, the Bank of Canada announced that it is raising its target for the overnight rate by a quarter of one percentage point, to 1.00%. This is the third rate hike in three months, as the Bank of Canada has steadily increased the overnight rate in stages from 0.25% - a rate that was set during the recession to help stimulate the economy.

The Bank's Governor, Mark Carney, reiterated his statement from the previous two meetings by saying that "any further reduction in monetary stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook". Largely a reflection of a weaker economic profile for the United States, Canada's largest trading partner, the Bank expects the recovery in Canada to be slower than what it had projected in its July Monetary Policy Report (MPR).

Despite having increased the target rate for the third time since June 2010, the Bank said that financial conditions in Canada continue to be accommodative. Supported by a stimulative monetary policy and improving credit conditions, consumption growth and business investment are both expected to continue to rise.

Although the rate increase had been predicted by several economists, the move was not widely anticipated.

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 overnight rate.

Canadian currency:
On the news of the announcement, the Canadian dollar appreciated versus the U.S. dollar. Any future increases without a similar move from the U.S. Federal Reserve may cause additional upward pressure for the Canadian dollar.

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

The next scheduled date for announcing the overnight rate target is October, 19 2010.

Bank of Canada press release:
www.bankofcanada.ca/en/fixed-dates/2010/rate_080910.html