Major chartered banks raised their prime rates Wednesday morning, moments after the Bank of Canada announced it was boosting its key overnight interest rate by one-quarter of a percentage point to 2.25%. The central bank also hinted that more increases were to come.
“Canada’s economic growth in the first half of this year was somewhat stronger than the Bank had been expecting, largely as a result of more robust external demand for Canadian goods and services,” the bank said.
The bank said it believes the economy is now operating close to its production capacity. “Core inflation, which was 1.9% in July, is consistent with this assessment,” it noted. “Total CPI inflation, at 2.3% in July, has remained above expectations, primarily because oil prices have been persistently higher than the Bank had assumed.”
“With the economy operating close to its capacity, monetary stimulus needs to be reduced to avoid a buildup of inflationary pressures. In this context, the Bank decided to raise its target for the overnight rate.”
The bank also warned there are still uncertainties, such as continued high oil prices, clouding the economic outlook. “In conducting monetary policy, the Bank will continue to pay attention to these factors as it assesses the evolving prospects for pressures on capacity and inflation.”
The central bank’s next scheduled date for announcing the overnight rate target is Oct. 19.
The quarter-point jump boosts the bank rate to 2.50%. Major banks were quick to up their rates. Prime rates jumped a quarter point to 4% and other lending rates are also expected to increase.
Economists had been expecting the increase. Derek Holt, assistant chief economist at the Royal Bank Financial Group, said the tone of the central bank’s statement suggests “a bias towards more hikes in the months ahead.”
Holt said in a report that the bank had pointed to three factors that it will keenly consider in the future: the size of the output gap; the future growth of Canadian exports and imports; and the effects of oil and non-energy commodity prices. “The Bank is wise to point to the large amounts of uncertainty surrounding each of these factors,” Holt said.
Holt noted his bank’s forecast for future movements remains unchanged. “We think the tone of the Bank’s statement combined with our expectations for the evolution of risks points to another couple of quarter-point hikes at the next fixed announcement dates of Oct. 19 and Dec. 7.”
Sherry Cooper, chief economist for BMO Nesbitt Burns Inc., said it will take a major development on one of the Bank’s three stated risks to convince it not to raise rates again next month.
“Even a soaring loonie is unlikely to stop the Bank, especially since the economy has readily shrugged off last year’s surge in the currency,” she said in a report. “The tightening process will look quite similar to the Fed’s measured campaign – a series of 25 basis point moves, taking rates back towards neutral. It’s onward and upward for short-term Canadian rates.”
Charted banks follow central bank, hike rates
Bank rate up a quarter-point; economists see more to come
- By: James Walker
- September 8, 2004 September 8, 2004
- 09:26