Canada increased interest rates

The Bank of Canada opted to increase the official interest rates by a further 25bps today to 0.75%. This was in-line with market expectations and the second increase in interest rates since the end of May 2010, when rates were at a record low of 25bps. Earlier this year Canada was the first of the G7 countries to start to hike rates, and remains the only country within the G7 to have increased rates.

In making the decision the Bank of Canada made the following key points about the global economy, Canadian economic growth and inflation:

• The global economic recovery is proceeding but is not yet self-sustaining. Greater emphasis on balance sheet repair by households, banks, and governments in a number of advanced economies is expected to temper the pace of global growth.
• Economic activity in Canada is unfolding largely as expected, led by government and consumer spending
• Canadian housing activity is declining markedly from high levels, consistent with the Bank's view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010.
• While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.
• The Bank of Canada expects the economic recovery in Canada to be more gradual than it had projected in April, with growth of 3.5% in 2010, 2.9% in 2011, and 2.2% in 2012.
• Inflation in Canada has been broadly in line with the Bank's April projection. While the Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April, the underlying dynamics for inflation are little changed.
• Both total CPI and core inflation are expected to remain near 2% throughout the projection period.

I would expect Canada to move very slowly on rates from current levels. They are unlikely to keep ratcheting rates higher, given the fragility of the global and domestic economic environment.

Download the presentation slides