Canada hikes rate another 25 bps on strong growth

     Canada’s central bank raised its benchmark target for the overnight rate by another 25 basis points to 1.0 percent, as expected by many economists, saying “today’s removal of some of the considerable monetary policy stimulus in place is warranted” due to a stronger-than-expected economy.
      It is the Bank of Canada’s (BOC) second rate hike this year following a first hike in July as it remains the only other major central bank in the world to tighten its monetary policy stance other than the U.S. Federal Reserve. Last month the Czech Republic’s central bank also raised its rate.
       The BOC has now raised its rate by 50 basis points this year and has fully unwound the two rate cuts in 2015 in response to the fall in crude oil prices.
      “Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation,” the BOC said, adding it would pay particular attention to the economy’s potential, the labour market and the sensitivity of the economy to higher rates given elevated household debt.
      The Canadian dollar, which has been rising against the U.S. dollar since January 2016, and especially since May in anticipation of BOC rate hikes, dipped slightly in response to today’s guidance and was trading at 1.24 to the U.S. dollar, down from 1.23 yesterday.
      But compared with the start of this year, the Canadian dollar, known as the loonie, is still up 8 percent against the greenback and the BOC noted the rise in the exchange rate reflected the strength of the economy.
      “Recent economic data have been stronger than expected,” the BOC said, supporting its view that economic growth is becoming more broad-based and self-sustaining, with robust consumer spending and solid growth in income and employment.
      Canada’s Gross Domestic Product expanded by 1.1 percent in the second quarter of this year from the first quarter for the highest growth rate since the third quarter of 2011. On a year-on-year basis GDP jumped 3.7 percent, up from 2.3 percent in the first quarter.
      At the same time the housing sector is now cooling in some of the major cities in response to recent tax changes and the BOC said it still expects overall growth to moderate in the second half of the year.
       Canada’s inflation rate remains below the BOC’s 2.0 percent target and wage and price pressures remain more subdued than in the past, with some excess capacity in the labour market.
      Headline inflation in July rose to 1.2 percent from 1.0 percent in June.

     The Bank of Canada issued the following statement: