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OTTAWA, July 13 (Canadian-Media): The Bank of Canada’s decision to raise its key interest rate from 0.5 percent to 0.75 percent on July 12 — its first increase since 2010 – would increase costs of mortgages, home equity lines of credit and loans linked to the big bank prime rates, media reports said
“Recent data have bolstered the Bank’s confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The Bank acknowledges recent softness in inflation but judges this to be temporary. Recognizing the lag between monetary policy actions and future inflation, Governing Council considers it appropriate to raise its overnight rate target at this time,” Bank of Canada's July 12 press release said.
Stephen S. Poloz, Governor of Bank of Canada and Carolyn A. Wilkins Senior Deputy Governor of Bank of Canada, said in the Monetary Policy Report Press Conference Wedenesday, in an opening Statement,
“Today, we raised our key policy rate by 25 basis points, in the context of an economy that is approaching full capacity and with inflation expected to reach the 2 per cent target within the next year. …Economic data have been encouraging over the past few months, globally and especially for Canada. We acknowledged this positive trend in our April MPR and in our May 24 press release, while noting concern about the sustainability of growth because of its composition, as well as US-based policy uncertainties...The Bank’s latest Business Outlook Survey, for example, finds very strong business sentiment, particularly for investment and hiring intentions, despite a lack of clarity about future US policies.”
Royal Bank of Canada, reportedly hiked its prime rate by a quarter of a percentage point, within an hour of the Bank of Canada news conference, which pushed up the monthly costs of credit lines and variable-rate mortgages.
It was in 2015 that the Bank of Canada had cut interests rates twice by a quarter of a percentage poin to help the economy to cope with increased oil prices.
Bank of Canada said on Wednesday, that adjustment had been complete.
“Growth is broadening across industries and regions and therefore becoming m ore sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding,..The Bank estimates real GDP growth will moderate further over the projection horizon, from 2.8 per cent in 2017 to 2.0 per cent in 2018 and 1.6 per cent in 2019” the bank said in a statement.
This increase of 2.6 percent this year, 1.9 percent next year and 1.8 percent in 2019 is reportedly much higher when compared with its April forecast for growth.
"The most important thing here is that this is good news for Canada," Poloz told reporters. "The accumulation of evidence and the growth in our confidence that the economy is on a solid trajectory should be good news for everyone," CBCNews reports said.
According to expectations, there would be another interest rate hike during the fourth quarter of this year, said Sherry Cooper, chief economist at Dominion Lending Centres.
"The Federal Reserve will also likely increase rates in [the fourth quarter]," Cooper said in a release. "Look for a slow crawl upward in interest rates from both central banks in 2018.
As a result of the rate increase, there was an upsurge of Canadian dollar, which was trading at 78.03 cents US late Wednesday morning.
The Bank of Canada expected -- along with business investment hike - increased exports in the coming months furthering better contribution to growth.
Consumer spending, expected the bank, to be a significant contributor to the economy, but increased of household debt and a slowdown in the housing market, said the bank, are a big burden on Canadian economy.
“Looking ahead, residential investment is anticipated to contribute less to overall growth,” the bank said. “Macroprudential and housing policy measures, as well as higher longer-term borrowing costs resulting from the projected gradual rise in global long-term yields, are all expected to weigh on housing expenditures.”
Bank of Canada's next scheduled rate announcement is expected to be onr Sept. 6.
(Reporting by Asha Bajaj)