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Bank of Canada Raises Interest Rates - How does this affect you?

The Bank of Canada increased the policy rate by 0.25% on July 12th, 2017, bringing the overnight lending rate to 0.75%

A couple weeks ago, this announce shocked most analysts because Canadian households continue to carry a large amount of debt, there has been consistently low oil prices and the market is sluggis (year-to-date the S&P/TSX Composite is at -1.7% as of July 7th).

Since the rate hike, the Canadian dollar appreciated against most major currencies and mortgage rates have increased at the five big banks.

Below incluedes an overview from TD Ecnomics:

Bank of Canada hikes, with more likely to come:

  • The Bank of Canada met market expectations, raising its key monetary policy interest rate by 25 basis points, to 0.75%.

  • In the text accompanying the decision, a relatively upbeat tone was struck, pointing to the absorption of a 'significant' amount of economic slack, a broadened base of economic growth, and an expectation of rising wages and employment.  The statement was, however, careful to note that although the current outlook warranted the removal of some monetary stimulus, future rate adjustments will be data-dependent.

  • Inflation was the missing piece of the puzzle ahead of today's decision.  While acknowledging the lack of inflation, the Band views recent softness as mostly temporary, pointing to food price competition, Ontario's electricity rebates, and other factors as holding back overall price growth.  The Bank expects that as these effects fade, inflation will return to 'close to' 2% by the middle of next year.

Key Implications

  • A sudden and dramatic change in the tone of the Bank's communications early last month had markets expecting a rate hike, and the Bank delivered.

  • Indeed, thepath for inflation is likely to be the key risk for the Bank, underscored by both the introduction of weak inflation as a risk to the outlook, and its placement at the top of the list.  That said, Governor Poloz has made it clear that barring a materialization of this risk, Canadians can expect more rate increases to come.

  • In the press conference, Governor Poloz suggested that the Bank's thinking regarding the path forward cannot be slotted into the categories of either removing the 2015 stimulus, or striving to normalize interest rates.  As such, we believe that another rate hike is likely at the Bank of Canada's October 2017 monetary policy decision, but a slightly slower pace of one 25bp every six months or so is likely thereafter.

 

 

 

Dan Lebelle

CFP CIM MFA RHU

Certified Financial Planner

Retirement Income Specialist


Dan Lebelle

 

 

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