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Bank of Canada raises benchmark interest rate to 1.5 per cent

13 July 2018

The Bank of Canada today increased its target for the overnight rate to 1 ½ per cent.

The central bank said it expects the Canadian economy to expand by 2 per cent per year on average between 2018 and 2020, noting that recently implemented tariffs on steel and aluminium will likely have only "modest" effects on growth and inflation.

"Governor Poloz did note the risk of a far greater shock to the economy should we see more tariffs (autos in particular) but suggested that they "can't make policy based on hypotheticals".

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Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data.

The bank said USA steel and aluminum tariffs imposed in June and retaliatory countermeasures by Canada in July would trim exports, imports and economic growth, and boost inflation, but strong global demand and higher commodity prices were offsetting the tariff headwind.

"Canada's economy continues to operate close to its capacity and the composition of growth is shifting", said the BOC.

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The Bank of Canada also has its eye on how widening global trade disputes, including an intensifying battle between the USA and China, will affect the world's economy. According to ratehub.ca, a mortgage worth $400,000 amortized over 25 years with a 5-year variable rate of 2.50 per cent, will now cost $50 per month or $600 per year.

The Bank of Canada is also releasing its quarterly update of projections, which predicts slightly stronger growth in both 2019 and 2020, compared with its outlook in April.

"My experience having come from Ireland five years ago is I've experienced recession and I've experienced interest hikes before so I'm cautious at this stage", said van Dijk.

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The Bank of Canada raised the key interest rate a quarter point to 1.5 per cent prompting some of the big banks to increase prime lending rates. It's expected to settle back down to two per cent in the second half of 2019.

Bank of Canada raises benchmark interest rate to 1.5 per cent