Bank of Canada raises rates, says more hikes to come

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 US trade policy that could choke off demand from Canada's largest export market.

OTTAWA-The Bank of Canada on Wednesday raised its benchmark interest rate by a quarter of a percentage point to 1.50% in response to solid economic data and expectations that exports and business investment will continue to grow.

However, the central bank said it would take a gradual approach to future rate increases amid mounting tensions over trade with the US, among other uncertainties.

Another rate hike today?

The Canadian dollar weakened to a more than one-week low against its USA counterpart on Wednesday as broad-based gains for the greenback offset an interest rate hike by the Bank of Canada and the prospect of further monetary policy tightening.

The decision, a move that will likely prompt Canada's big banks to raise their prime rates, arrived in the middle of a trade dispute between Canada and the United States that's expected to hurt both economies.

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The bank's relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in almost four weeks, and economists said they expected the central bank to hike again by year end.

CPI and the Bank's core measures of inflation remain near 2 per cent, consistent with an economy operating close to capacity. Talks to renegotiate the North American Free Trade Agreement stalled earlier this year, and Canada imposed retaliatory tariffs this month.

Economists anticipate several more hikes this year and in 2019.

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. Inflation ran at a 2.2-per-cent pace in May, slightly above the Bank's target of 2 per cent.

Consumer price inflation is expected to edge up to 2.5 per cent before returning to around 2 per cent by the second half of 2019.

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