Bank of Canada Raises Interest Rate to One Percent

The Canadian dollar strengthened on Thursday to a new 2-year high against its US counterpart as the market weighed prospects of additional Bank of Canada interest rate hikes and the greenback lost ground against a basket of major currencies.

On Wednesday, the Bank of Canada increased the target for its overnight rate by 25 basis points to one per cent. We export about 75 per cent or so, maybe a little more, to the United States of what we pull out of the ground or grow here.

With Vancouver and Toronto sustaining high levels of immigration and typically benefitting from a strong United States economy, employment opportunities and low commodity prices, Holt says the advantages should offset the rising interest rates.

RBC, Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, and Bank of Nova Scotia have moved to increase their prime lending rate by 25 basis points from 2.95 per cent to 3.2 per cent, effective September 7.

The advice he’s been giving clients for the a year ago is to expect interest rates to rise.

The commodity-heavy TSX dropped a moderate 30.32 points to 15,059.83, but it had been positive before the Bank of Canada’s 10 a.m. ET rate announcement.

Interest-rate sensitive sectors including telecoms and utilities, which typically issue debt to pay for projects and pay out dividends made less attractive by higher government bond yields, fell after the central bank said surprising strong economic growth supported its second rate hike since July.

If the US central bank is not raising rates at the same time, that could drive the Canadian dollar up too far and undermine the economic outlook, said Stefane Marion, chief economist at National Bank Financial.

In the USA, where the bank has a large deposit base, the four rate hikes handed down by the Fed has been a “tailwind”, he added.

After seven years, the Bank of Canada approved a month ago a rise of 0.25 percentage points, and on Wednesday announced another similar rise to reach one percent.

The rate hike Wednesday likely came as a bit of a surprise for some experts.

Others predicted the bank would refrain from moving the rate out of concern such a move would drive up an already strengthening Canadian dollar and pose a risk to exporters.

Looking forward, the BoC suggested that there could be more rate hikes in the future.

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