Bank of Canada Hikes Interest Rate to 1.50%, CAD Climbs in Response

Image of daily change for major currencies

The bank expects the negative blow of the trade policies to be largely offset by higher oil prices and the stronger USA economy - both of which, on balance, will benefit Canada.

The bank, however, didn't quantify the possible effects of auto tariffs on Wednesday.

Canadian businesses must also contend with the uncertainty surrounding the hard renegotiation of the North American Free Trade Agreement, for which talks have stalled. Temporary factors are causing volatility in quarterly growth rates: the Bank projects a pick-up to 2.8 per cent in the second quarter and a moderation to 1.5 per cent in the third.

"The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar".

"We need to base our decision on what we actually know", he said.

Aside from the US trade threat, there isn't much to keep the Bank of Canada on hold, added Brett House, deputy chief economist for Scotiabank Economics.

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In addition to tariffs, Canadian businesses must also contend with the uncertainty surrounding the stalled talks on NAFTA's renegotiation. It warns that "escalating trade tensions pose considerable risks to the outlook" at the global level.

In a statement, the BOC said it expects the global economy to grow by about 3.75% this year, and by and 3.5% next year.

Poloz also signaled he was comfortable with how financial markets were interpreting the central bank's message, noting the hike was "highly anticipated".

So what does the rate hike mean for Canadians?

The rate increase, by a quarter of a percentage point, took the bank's overnight interest rate to 1.50 percent, still well below the "neutral" rate of 2.5-3.5 percent the bank sees as a sweet spot for monetary policy, where it neither boosts nor restrains growth. The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack.

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