Eight times per year, the Bank of Canada meets to determine what the base lending rate should be. Any change to this industry benchmark indicates a possible change to corresponding rates, such as interest rates for mortgages and additional types of consumer loans. This information is also a good indicator of the current status of the Canadian economy.
Canada’s central bank announced an increase to their benchmark interest rate today for the first time since August 2010, citing that the rate cuts from 2015 had “largely done their job.” The overnight lending rate – up from 0.5 percent to 0.75 percent – makes the cost of borrowing more expensive and is likely to affect the prime rate at Canadian lending institutions. This means that consumers can expect to pay more for variable rate mortgages and lines of credit moving forward.
This rate increase was widely expected by Canadian Economists and Financial Analysts, as the Bank of Canada had been signalling an impending increase in recent speeches and interviews within the past few weeks.
In their statement today, the Bank indicated that “Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed. The very strong growth of the first quarter is expected to moderate over the balance of the year, but remain above potential.”
Growth in the economy is expected to hit 2.8 percent in 2017, up from the 2.6 percent projected in the April forecast. The central Bank expects growth of 2 percent in 2018 and 1.6 percent in 2019.
The Bank also acknowledged some recent softening in inflation – with the three measures of core inflation sitting below the 2 percent target – but attributed this to temporary factors, including:
- Heightened food price competition
- Electricity rebates in Ontario; and
- Weaker than expected automobile pricing
Inflation is expected to return near 2 percent by mid 2018.
The next rate announcement will take place on September 6, 2017, with many experts predicting a second rate hike before the year-end.
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