Bank of Canada Raises Key Interest Rate To 1.50%

Image of DailyFX economic calendar

The fourth rate increase since July 2017 comes as Canada grapples with the pressures of rising inflation and solid job growth despite an increasingly hostile USA trade policy that could choke off demand from Canada's largest export market.

For one, Poloz said the bank can't make policy decisions based on "hypothetical scenarios".

With two daughters off school over summer, finding affordable activities is key for Florence van Dijk, especially following news of yet another interest rate hike.

Another hike this week would come with Canada facing a number of trade-related uncertainties, including NAFTA talks, US steel and aluminum tariffs and the threat of more duties on the economically critical automotive sector.

CPI and the Bank's core measures of inflation remain near 2 per cent, consistent with an economy operating close to capacity.

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.

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Poloz stressed the bank will continue with its gradual, data-dependent approach as it moves towards its neutral rate, which his team has pegged between 2.5 and 3.5 per cent.

The Bank of Canada's quarterly update predicts the economy will show growth in 2019 and 2020, a better outlook than what was forecast in April.

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

The Royal Bank of Canada said Wednesday it will increase its prime rate by a quarter of a percentage point to 3.70 per cent, effective Thursday.

It means consumers with variable rate mortgages or upcoming mortgage renewals will have to pay more.

The bank, however, noted in its report that despite "healthy" labour market conditions, employment growth and average hours worked have slowed down compared to last year's surge. It also said underlying wage growth has been weaker than what would normally be expected in a tightened job market.

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