Coming into Wednesday, only a select group of economists and analysts thought the Bank of Canada would hike rates. Most were forecasting the BoC normalizing rates further this year, but not until at least October. On July 12, the bank raised rates for the first time in almost seven years.
Those with the earlier-than-later foresight were right, as the main bank edged rates up 25 basis points for the second time in 2017, making the overnight rate 1%. Since slashing rates because of the global financial crisis dubbed the Great Recession that ended in 2009, central banks have been closely watched for interest rate hikes as a signal that nations are healing from the financial collapse nearly a decade ago.
In fact, the Bank of Canada cited stronger than expected economic data, including “robust” consumer spending, strength in business investment, exports and solid employment and income growth. To that point, the bank described the economic advancements as becoming “broadly-based” and “self-sustaining.”
The bank advised that it is still on watch for potential speed bumps, such as geopolitical risks and uncertainties that abound, such as concerns about international trade and undetermined fiscal policies throughout the globe. While commodity prices, especially oil, Canada’s top export, have been on the rise, they remain stubbornly low. Canada was thrust into a brief recession in the first half of 2015, sideswiped by nosediving crude prices and wildfires in the western part of the country.
When it comes to trade with the U.S., newly elected American President Donald Trump has threatened to tear up the North American Free Trade Agreement, with his administration already taking steps to make it more expensive for Canadian softwood lumber to enter the U.S. markets.
The Bank of Canada further noted inflation holding below its 2% and that the nation’s inflationary pressures are subdued compared to some other advanced economies, while countering that in saying that it sees a “slight increase” in its core measure of inflation.
As is often the verbiage of central banks, no future moves are set in stone, as they will be determined by analysis of economic data and other developments. Bank officials also want to see what type of meaningful impact the second rate hike has on its citizens carrying an inordinately high level of debt.
Read in whatever light, it looks like the Bank of Canada is sending a message that the days of completely easy money are coming to an end.
The Canadian dollar continued its upward climb on the news, trading up around 81.8 U.S. cents to gain about 1.2% on the day and 1.6% already this week. The loonie has taken back about 14% from the greenback since hitting a 2017 low of 73 cents in April.