The Bank of Canada (BoC) increased interest rates for the first time in seven years in its July 2017 meeting. Now, for the second consecutive time, the BoC has increased its benchmark overnight interest rate. Most economists expected Governor Stephen Poloz to hold on to the rate hike in the most recent BoC meeting (read: Canada Hikes Rates: ETFs in Focus).
The key interest rate was hiked to 1% from 0.75% on September 6, 2017. The rate hikes come as the BoC governor aims to nullify the impact of the two rate cuts introduced in 2015 to battle falling oil prices. The news led to a rally in the Canadian dollar.
Strong Economic Fundamentals
Recent data from Statistics Canada show that the economy is on a strong footing. Canada’s economy expanded 4.5% on an annualized basis in the second quarter of 2017, as household spending surged, owing to strong consumer confidence. This was above market expectations of a gain of 3.7% (read: Can Canadian ETFs Continue Their Rally?).
Moreover, consumer confidence in Canada hit a 10-year high in August. It increased to 122.9 in August from 120 in July. Household spending increased an annualized 4.6% in the second quarter compared with 4.8% in the first. The strong two-quarter increase is reflective of consumers’ confidence in future income.
Big Banks to Follow
Canada’s big five banks, including Royal Bank of Canada, Bank of Montreal, TD Canada Trust, Bank of Nova Scotia and Canadian Imperial Bank of Commerce, hiked their prime rates to 3.2%. This is expected to impact housing debt in Canada, as consumers with variable-rate mortgages will feel the rate hike, owing to the decision of the big five banks to follow suit.
Moreover, the BoC said that further rate hike decisions will be contingent on the economy’s fundamentals. The unemployment rate in Canada decreased to 6.3% in July 2017 from 6.5% in the previous month.
Despite the risks involved, including geopolitical risks and high trade risks from potential renegotiations in NAFTA, the economy’s fundamentals remain strong. Therefore, economists predict that further rate hikes might be possible (read: Canada Wholesale Sales Decline, Inflation up: ETFs in Focus).
