Bank of Canada Raises Interest Rate

The Bank of Canada released a statement this morning announcing the first interest rate increase in three years which makes it the first of the G-7 countries to raise it’s rates since the financial crisis. The central bank increased the overnight rate to 0.5% from the emergency low of 0.25%. The market felt the effects of the rate hike as the Canadian dollar fell against the US dollar and bond yields dropped this morning.

Today’s rate change will likely lead to an increase in prime rates offered by banks and lenders. As suggested in the article by CTV news, “short-term, variable mortgage rates [are] also likely rise, but longer-term fixed mortgage rates are expected to remain unchanged for now,” as they are more influenced by the bond market.

It is expected that there will be further changes to the lending rate and that it could reach 1.5% by the end of this year. However, as Jeremy Torobin outlined in his Globe and Mail update, there is much uncertainty around the global outlook due to the European financial crisis and any “further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.” Ultimately, we will likely not be seeing rate hikes of 50-basis points or more due to the volatility of the current economic environment.