Canada joins USA in hiking interest rate, with caution

Thursday, 13 Jul, 2017

The Canadian Dollar saw yet another surge in demand on Wednesday afternoon when the Bank of Canada hiked Canadian interest rates from 0.5% to 0.75% as speculated.

The Bank of Canada governor Stephen Poloz feels as though the economy is on much better footing. Canada's interest rates are similar to playing with fire, as keeping low rates induces more consumption and increased debt levels, raising them makes debt more unsustainable as this increases the cost of borrowing. For example, the last time the central bank made a move, in July 2015, it cut rates by 0.25 of a percentage point, but mortgage lenders cut variable-rate mortgages by only 0.15 of a percentage point.

Governor Poloz stated that about 75% to 80% of Canadians are locked into a fixed rate mortgage and that today's interest rate hike should not have a drastic impact on mortgage holders.

The Canadian economy added an estimated 45,300 new jobs in June, which far exceeded the consensus forecast of 10,000 new jobs for the month.

Friday's strong Labour Market Report also supoported the outlook for the currency as it further increased the possibility the BOC will think the time is right to remove the stimulus crutch of super-low interest rates. He also stated that investment in Canada is less than it would be if trade uncertainties were not present, however, people have moved past it and the Bank has seen stronger investment.

"The Bank of Canada will probably take some comfort from indications that export growth is holding up", said Paul Ferley, Royal Bank of Canada assistant chief economist.

Federal Reserve chairwoman Janet Yellen kicked of two days of testimony in front of Congress Wednesday, telling legislators that the USA central bank expects to keep raising its key interest rate at a gradual pace and also plans to start trimming its massive bond holdings this year.

"And so the tide begins to turn", Porter wrote in a brief note to clients.

The contrasts in tone between the Bank of Canada's statement on Wednesday and the statement it delivered three months ago on April 12 are striking. The central bank upgraded the growth outlook again, expecting the economy to expand 2.8 percent in 2017 and 2 percent in 2018.

"It's not how I interpret the data, it is how they interpret the data", said senior rates strategist Andrew Kelvin at TD Securities, which had expected the bank to hold rates steady rather than hike because the Consumer Price Index (CPI) had shown subdued inflation. Policymakers attributed the weakness to "heightened food price competition, electricity rebates in Ontario, and changes in automobile pricing". Macquarie predicts the currency to drop to 65 cents USA in the next 12 months after a rough 2016.

Canada's economy is a top performer among the G-7, leading the pack in first-quarter growth, with a 3.7% annualized gain. You could go on to analyze the aspects of the housing and auto markets, to extract exact numbers or data but this should be pretty intuitive to any financially minded individual.