Bank of Canada Raises Key Interest Rate To 1.50%

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In particular, the trade impacts were caused by the Trump administration's recent steel and aluminum tariffs on Canada and, in response, Ottawa's retaliatory duties on USA imports. Temporary factors are causing volatility in quarterly growth rates: the Bank projects a pick-up to 2.8 per cent in the second quarter and a moderation to 1.5 per cent in the third.

The increase will raise the cost of borrowing for customers with loans linked to the prime rate such as variable rate mortgages and lines of credit.

The Bank of Canada today increased its target for the overnight rate to 1 ½ per cent.

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.

"Although there will be hard adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest", the bank said in a statement. Talks to renegotiate the North American Free Trade Agreement stalled earlier this year, and Canada imposed retaliatory tariffs this month.

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Aside from the USA trade threat, there isn't much to keep the Bank of Canada on hold, added Brett House, deputy chief economist for Scotiabank Economics.

If the trade dispute deteriorates further, resulting in something as damaging to the economy as auto tariffs, hiking the interest rate now would also give Poloz more flexibility to lower it down the road, if necessary.

"The Bank maintained a cautious tone while highlighting its data dependency, that said, this was not the "dovish" hike many, including ourselves, expected".

Scott Hannah says higher interest rates have also helped to cool down the country's real estate markets, helping future homeowners.

CIBC chief economist Avery Shenfeld wrote in a research note Wednesday that "there are worries ahead, growth hasn't been stellar, but the backdrop has been just good enough for the Bank of Canada to nudge rates a quarter point higher".

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