Bank of Canada Surprises With Another Rate Rise

A new subdivision rises in Kleinburg Ont. this year. A rate rise this week would likely make floating-rate mortgages rise almost immediately though stress test rules may blunt the effect on the wider market

That marked the central bank's first rate hike in seven years. The suggestion is the Canadian dollar gains aren't totally reflective of growth.

"We can't rule out anything in coming meetings", said Doug Porter, chief economist at BMO Capital Markets.

"The message being sent they are ready to hike rates, irregardless of developments in the US", said Jimmy Jean, economist at Desjardins Capital Markets.

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.

Meanwhile, signals from senior Federal Reserve officials have clouded the outlook for rates in the US with concerns inflation hasn't picked up steam as previously expected.

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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 rate increase means governor Stephen Poloz has now reversed the two cuts he introduced in 2015 to help the economy deal with the plunge in oil prices.

In a statement, the Bank of Canada noted that consumer spending remains robust, "underpinned by continued solid employment and income growth".

Future policy will be determined by evolution of the economy with close attention paid to the sensitivity of the economy to higher interest rates given elevated household indebtedness.

There had been a slight increase in total CPI and the bank's core inflation readings, consistent with the absorption of economic slack.

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Analysts are busily upgrading their forecasts in the wake of last week's bullish economic data and Wednesday's interest rate hike.

Statistics Canada reported weak trade results just before the release of the Bank of Canada's decision. They added the central bank might also want to gauge market reaction to Federal Reserve plans to shrink its balance sheet and contain any further upward move in the value of the Canadian dollar, which threatened to weigh on export growth.

The bank said there remains "significant geopolitical risks and uncertainties" around global trade and fiscal policies that have weakened the US dollar.

Investors anxious that the sharp appreciation of the Canadian dollar would hurt prospects for producers of commodities priced in USA dollars. He says there's been a big swing in sentiment on the loonie, and that the rapid appreciation in the Canadian dollar suggests the prospect of the currency to appreciate further is quite limited at this stage.

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