Top Canadian banks raise prime rates after central bank rate hike

Ivan Schwartz
January 18, 2018

OTTAWA-As was widely expected, the Bank of Canada raised its overnight rate target by 0.25 percent to 1.25 percent on January 17 while sounding a cautious tone as the NAFTA renegotiations risk increases.

Responding to the first of the three recent rate increases, local mortgage expert Dustan Woodhouse said, "It's not about the interest rate, that shouldn't concern you - it's about the effect that interest rate rise will have on the payment you make on your mortgage".

While more rate hikes are probably warranted, some continued monetary policy accommodation will likely be needed to maintain optimal growth and inflation, the bank said, signaling it will not rush to return rates to more normal levels after they were slashed to historic lows in the wake of the financial crisis.

Readers can learn more about why markets are so convinced the Bank of Canada will raise interest rates here.

"Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity", the bank said in a statement.

However, with the new higher interest rates and stricter mortgage guidelines, residential home sales may tend to slow going forward.

In addition to this, the decision comes at a time when Canada has the highest household debt.

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The rate increase "was a rear view mirror move, but the Bank of Canada hints that the view out the front window isn't quite as sunny", said Avery Shenfeld, chief economist at CIBC World Markets. Canada, which sends about 75 percent of its exports to the United States, is increasingly convinced U.S. President Donald Trump will soon announce that the United States intends to pull out of NAFTA. Prior to the Bank of Canada's move, their rates were all 3.2 per cent. The Bank of Canada has raised its target for the overnight rate to 1.25 per cent. "But perhaps not as fast and furious as the market was starting to think". The Bank's outlook takes into account a small benefit to Canada's economy from stronger U.S. demand arising from recent tax changes.

The Bank of Canada warned that lower corporate taxes in the USA could encourage firms to redirect some of their business investments south of the border. President Donald Trump told The Wall Street Journal last week he is prepared to withdraw from the deal unless significant changes demanded by the USA are made.

The central bank raised its forecast for 2018 growth to 2.2 percent from 2.1 percent, while it also bumped up its forecast for 2019, after an estimated 3.0 percent expansion in 2017.

"A 25 basis-point increase is about $250 a year and that's manageable if you really have a plan that takes advantage of that information and you understand where your spending is going", says Hubbard.

The Bank of Canada stressed Wednesday that it would remain data dependent when mulling future rate decisions.

That part of the puzzle is likely to be solved today as we have the BOC rate announcement as well as the statement scheduled to be released today.

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