AP News, July 10th, 2007
The Bank of Canada raised its key overnight rate by one-quarter of a percentage point to 4.5 percent Tuesday, a move that will likely keep the Canadian dollar flying high and help cool the country's hot economy.
The move by central bank governor David Dodge was long anticipated in the financial community, but it likely won't be the bank's last rate hike this year.
In a strong signal, the bank said it may have to increase interest rates moderately again, an indication that it may raise the key rate to 4.75 per cent at its next scheduled opportunity on Sept. 5.
"The bank judges that the economy is now operating further above its potential than was projected at the time of the April Monetary Policy Report," it said in a short statement. "Both total (inflation) and core inflation have been higher than projected in April and are above the two per cent inflation target."
Although it was the first hike for central bank in more than a year, it is not expected to have a major impact on the markets. Most traders had priced in the hike for months.
Economists believed Canada's booming economy and inflationary pressures would prompt Canada's central bank to increase rates.
"I don't think you'll see much of a reaction because the market has priced in both this increase and another one in September," said Marc Levesque, chief economic strategist for TD Securities. "
The U.S. Federal Reserve, meanwhile, has left its key rate unchanged at 5.25 percent for the past year.
While a quarter of a percentage point is seen as having only a minor effect on consumer buying habits, the major impact may be on Canada's beleaguered manufacturing sector, particularly in Ontario and Quebec.
The economy has lost over 100,000 factory jobs in the past year and higher interest rates will help boost the dollar, making Canadian exports more expensive in foreign markets.
In a statement, the bank said it needed to raise rates because the economy was operating above capacity and inflation has been running too hot and been unexpectedly persistent.
It now projects that inflation will remain above the desired two per cent target until early 2009.
As well, the Canadian dollar, which the bank said as late as April would trade well under 90 U.S. cents, is now projected to trade in the 93 to 95.5 U.S. cent range in 2008 and 2009.
The bank said the Canadian economy will continue to grow at a healthy 2.5 percent for the next two years.
