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Bank of Canada raises key interest rate to 1.25%

Why the Bank of Canada raised its key interest rate to 1.25%
WATCH ABOVE: Why the Bank of Canada raised its key interest rate to 1.25%

The Bank of Canada (BoC) raised its trend-setting interest rate to 1.25 per cent on Wednesday, marking the third 0.25 percentage point increase since July and the first time the rate rose above 1 per cent in nine years.

READ MORE: Staggering share of Canadians fear bankruptcy if interest rates rise much more

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The move matches the expectations of most economists and investors, who had been anticipating another hike after two consecutive blockbuster jobs reports for November and December. The economy churned out just under 160,000 net new jobs over the last two months of 2017, pushing Canada’s unemployment rate to 5.7 per cent, the lowest level since comparable record-keeping began in 1976.

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WATCH: Bank of Canada announces interest rate hike

Bank of Canada announces interest rate hike
Bank of Canada announces interest rate hike

READ MORE: Canada’s unemployment rate falls to lowest rate in over 40 years: StatCan

The central bank’s own survey of Canadian companies added more fodder for a rate increase. The so-called Business Outlook Survey, a closely watched barometer of business sentiment in this country, sounded an upbeat note last week, showing that companies across the country are feeling optimistic about the future and have plans to boost both investment and hiring.

READ MORE: Mortgage calculator: See how rising interest rates affect your payments

Still, the BoC struck a cautious note in the statement accompanying its interest rate announcement. Despite an expected “small benefit” to the Canadian economy from strong growth in the U.S., concerns about the future of NAFTA continue to weigh on Canada’s economic outlook, it warned.

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Vulnerability to economic ‘shocks’ has grown in Canada
Vulnerability to economic ‘shocks’ has grown in Canada

Consumer spending and the housing market are also expected to contribute less to growth as a result of higher interest rates and stricter mortgage rules, the bank said.

Although the BoC indicated that its key policy rate might climb further, there was “no indication of the pace at which it will increase,” said Steve Ambler, David Dodge Chair in Monetary Policy at the C.D. Howe Institute.

 

The central bank also noted that wages are rising at a slower pace than “would be typical” in a labour market as tight as the current one.

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Despite robust economic growth, subdued wage growth might limit the extent to which inflation will rise, giving the central bank latitude to proceed slowly on further rate increases, said Ambler.

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Although investors expect two more rate increases of 0.25 percentage points each by the end of the year, “I would be surprised if [the BoC] had two [hikes] in a row,” said Ambler.

The BoC’s next interest rate announcement is March 1.

The central bank also offered updated economic projections in its Monetary Policy Report.