Bank of Canada raises overnight rate target to 1 ½ per cent

Stephen Poloz. iPolitics  Matthew Usherwood

Stephen Poloz. iPolitics Matthew Usherwood

The central bank says higher rates will be necessary to keep inflation near its target but intends to go with a gradual, data-dependent approach.

Citing a prudent, data-dependent approach, Poloz hasn't touched the rate since he increased it in January, a move that followed increases a year ago in September and July.

Another rate hike today?

The decision, a move that prompted some of the big banks to start raising their prime rates later in the day, arrived in the middle of a trade dispute between Canada and the United States that's expected to hurt both economies.

Poloz recently said the impacts of the U.S.

Business loans, student loans, lines of credit and home equity lines of credit will cost more to service. The tariff fight, the bank estimated, will shave almost 0.7 per cent from Canada's economic growth by the end of 2020. The bank had been criticized for a surprise rate hike last September.

The bank expects the negative blow of the trade policies to be largely offset by higher oil prices and the stronger USA economy - both of which, on balance, will benefit Canada.

"The escalation of trade actions was quite a part of our discussions, but we agreed very early on that it was not going to be the basis for our decision", Poloz told a news conference.

Another hike this week would come with Canada facing a number of trade-related uncertainties, including NAFTA talks, USA steel and aluminum tariffs and the threat of more duties on the economically critical automotive sector.

In addition to tariffs, Canadian businesses must also contend with the uncertainty surrounding the stalled talks on NAFTA's renegotiation.

"My experience having come from Ireland five years ago is I've experienced recession and I've experienced interest hikes before so I'm cautious at this stage", said van Dijk.

Recent signals from the Bank of Canada governor, combined with strong economic data, have experts widely predicting Poloz will raise his trend-setting rate Wednesday from its current level of 1.25 per cent.

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