GDP growth rate drastically raises odds of interest rate hike

The Bank of Canada on Wednesday raised its benchmark interest rate by a quarter-percentage point to 1%, signaling further increases are in the works as Canada's economic growth roars to the top among Group of Seven countries.

"If you believe that we are in a rising rate environment then I think generally speaking it's a positive event for TD as long as the rate hikes are in an orderly fashion and do not tip the economy into a major slowdown", Masrani said.

After years of economic pain in Canada induced by slumping commodity prices, the surprise move has flipped policy divergence on its head.

According to the statement, recent data has been stronger than expected, supporting the bank's view that growth is becoming more broadly based and self-sustaining.

Speculation that the central bank was going to begin moving the key interest rate up intensified earlier this summer, when Bank of Canada Governor Stephen Poloz said these cuts had "done their job". "There has also been more widespread strength in business investment and in exports", the bank continues.

Canada's currency climbed as much as 1.8 percent after the decision, reaching 82 cents compared to the USA dollar, the highest intraday level since June 2015, and extending the gain this year to 10 percent.

The bank cited Canada's stronger-than-expected economic performance for the hike, warranting a removal of some of the "considerable" stimulus in place.

As Canada celebrates its 150th birthday, the economy is strengthening. Given that overnight swaps had only afforded a 44 percent probability that the central bank would move at today's meeting, the Canadian Dollar responded with an abrupt rally as its yield advantage leveraged the general appetite for return and risk appetite.

But there remains uncertainty over continental free trade talks with the United States and Mexico, and hurricanes pounding the heart of the U.S. refining capacity in the Gulf coast region - given that Canada exports most of its oil to its southern neighbor. The next announcement is slated for October 25th, when the bank will also release its latest Monetary Policy Report.

"The Bank has said that future increases will not be "predetermined", which aims perhaps to indicate to the markets that they will not increase the rate a quarter point at each meeting, " wrote CIBC in a note to its clients.

But particular focus, it said, will be given to labor market conditions, and given Canadians' high level of indebtedness, "to the sensitivity of the economy to higher interest rates". It noted, however, that upward pressure on wages and prices remain more subdued than historical trends would suggest, which has also been seen in other advanced economies.

Related Articles