Bank of Canada raises interest rate to 0.5 per cent
Published Tuesday, June 1, 2010 9:07PM EDT
The days of record low interest rates in Canada appear to be coming to an end, as the Bank of Canada announced Tuesday its first interest rate increase in three years.
The central bank hiked its overnight lending rate from 0.25 per cent to 0.5 per cent, an increase that was quickly matched by major banks.
BNN's Michael Kane told CTV's Canada AM that GDP numbers released Monday were likely "the final nail in the coffin for record low interest rates."
Those figures showed the country's gross domestic product expanded by a whopping annual rate of 6.1 per cent in the first three months of this year -- the largest quarterly increase in more than a decade.
Indeed, the statement from the Bank of Canada suggested those results figured prominently in its decision.
"Activity in Canada is unfolding largely as expected. The economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth has resumed," the statement read.
"...In this context, the Bank has decided to raise the target for the overnight rate to 1/2 per cent and to re-establish the normal functioning of the overnight market."
The bank's optimism was tempered by worries about "spillover" from the European debt crisis -- which, it noted, has so far been limited -- and said there remains "considerable uncertainty" about an "increasingly uneven" global recovery.
Patricia Croft, chief economist for RBC Global Asset Management, said the bank's caution about overseas economies means a further rate hike in July is far from certain.
"The Bank of Canada did not focus on the strength in the Canadian economy, but rather focused on the uncertainty in the world economy, what's happening in Europe with the debt crisis that just won't go away, problems in China … the U.S. still struggling in some ways in their own recovery," Croft told CTV News Channel Tuesday afternoon. "So I think that's a surprise for me just how cautious the bank was."
The Bank of Canada's rate hike is the first among the Group of Seven wealthy nations since the global recession began two years ago.
Prime lending rates, which banks extend to their best customers, quickly followed the Bank of Canada increase.
The TD Bank was the first to announce a quarter-point hike in its prime lending rate to 2.5 per cent, effective Wednesday. The Royal has followed suit and all the other major banks are expected to announce the same increase to their primes, which influence variable rate mortgages and lines of credit.
Short-term, variable mortgage rates will also likely rise, but longer-term fixed mortgage rates -- which are more influenced by the bond market -- are expected to remain unchanged for now.
During Question Period in the House of Commons Tuesday, Liberal Leader Michael Ignatieff said the rate hike has come too soon for Canadians.
"These interest rates will make it harder for Canadians to spend on child care, on training and on learning," Ignatieff said. "Instead of helping these Canadian families, we've got a government that doesn't know how to manage public money."
Prime Minister Stephen Harper defended the move.
"When it comes to economic management, this government has the best growth rate in the developed world because of the policies of this government," Harper told the House.
The rate hikes may not stop here. Many expect further tightening, with some predicting the overnight lending rate could rise as high as 1.5 per cent by the end of the year. The central bank tried to keep such expectations in check in its statement.
"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," it said.