Bank of Canada Raises Key Interest Rate To 1.50%

Image of daily change for major currencies

Image of daily change for major currencies

The rationale for USA rate hikes is simple, Rosenberg said, citing how recent US corporate tax cuts have been adding "gargantuan" fiscal stimulus to the US economy at a time of strong employment.

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

Poloz also signaled he was comfortable with how financial markets were interpreting the central bank's message, noting the hike was "highly anticipated".

The country's inflation rate is expected to rise as high as 2.5% - above the 2% mid-point of the bank's target range - due to temporary factors such as higher gasoline prices.

"The escalation of trade actions was quite a part of our discussions, but we agreed very early on that it was not going to be the basis for our decision", Poloz told a news conference.

Bank of Canada Governor Stephen Poloz said the rate hike was appropriate since Canada's economy is operating near capacity and inflation is on target.

Raising interest rates will nearly certainly slow consumer spending, and there is no guarantee that Canadian business investment will increase to offset that - especially in the face of increased global trade tensions, Rosenberg said.

"Although there will be hard adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest", the bank said in a statement. The economy's growth projection for this year remains at 2%, the bank said.

The bank raised the rate even as it predicts larger impacts from the widening trade uncertainty, particularly after the United States imposed steel and aluminum tariffs on Canada and Ottawa's retaliatory measures.

The Bank expects the global economy to grow by about 3 ¾ per cent in 2018 and 3 ½ per cent in 2019, in line with the April Monetary Policy Report (MPR).

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.

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