BoC rate hike…an experiment?

The Bank of Canada (BoC) has hiked its benchmark interest rate to 0.75 per cent from 0.5 per cent, its first increase in nearly seven years (Sept 2010), with expectations for stronger economic growth this year.  This is somewhat of an experiment, heavily influenced by the U.S.'s rate hikes recently.  If anything, the BoC wants to put back in its toolbox the ability to cut the bank rate if the economy shows signs of weakness in the future.

In 2015, BoC lowered its rate twice in order to deal with the crash in oil prices that wiped out $60 billion annually from the Canadian economy.  Today, BoC is saying the economic adjustment to lower oil prices has now been made.  Other areas of the Canadian economy have picked up the slack; growth across other industries is broadening and becoming more sustainable.

Canada is in the midst of one of its best economic growth runs since the 2009 recession.  Expansion has increased to a growth rate above 3 per cent in the past four quarters. This rate of growth happens to be the fastest among G-7 countries.  This is more than what the central bank considers Canada’s capacity to grow without causing inflation.  Canada's labour market has also been very good, the jobless rate being at the lowest since before the recession.

Canada's major financial institutions will likely increase their prime rate of lending to 2.95%, either immediately or by month's end.