As we discussed last Friday in our Weekly Update, the Bank of Canada followed up on expectations by raising its overnight rate by 25 basis-points to 1.00%. Analysts had forecast a rate hike in either October or December, but recent Q2 GDP growth data exceeded expectation, leading some to predict a rate hike this week. This is the second such rate increase of 25bps, following up on the July 12th increase. Before the July increase, the overnight rate had been at 0.50%.
Inflation is below the 2% target, but there was a slight uptick during Q2. In the face of continued and robust consumer spending, solid employment figures and income growth, the Bank of Canada acted to raise the rate as a means of stemming further inflation.
Recent rate levels have been at historic lows, so these recent rate increases were, in a way, inevitable; still, they are the first such increases in 7 years. The Bank of Canada is confident that the economy is strong enough to weather these increases.
As one might expect, the markets have reacted by driving the Loonie up over 1 cent vs the Greenback to 81.81 cents USD, a 1.29% increase (as of 2:33pm EST).
Sources: Globe Advisor, Bank of Canada