Bank of Canada Surprises With Another Rate Rise

Bank of Canada Surprises With Another Rate Rise

"Recent economic data have been stronger than expected", says the Bank of Canada, surprising the markets by raising its benchmark overnight rate 25 basis points to 1%.

This marks the second straight meeting Canada's central bank increased its main interest rate, after being on hold for seven years. It also noted the recent appreciation of the Canadian dollar, which reflected USA trade and fiscal uncertainty and the relative strength of Canada's economy.

But there remains uncertainty over continental free trade talks with the United States and Mexico, and hurricanes pounding the heart of the U.S. refining capacity in the Gulf coast region - given that Canada exports most of its oil to its southern neighbor.

It noted that inflation remained below its 2.0 percent target, but said there is still some excess capacity in the labor market, and wage and price pressures "are still more subdued than historical relationships would suggest". The housing market appears to be cooling in some markets, while there has been more widespread strength in business investment and in exports, the bank noted. The decision comes as a surprise.

Traders have put a 57% chance of a second rate hike this week, but conventional wisdom still places the next hike in October when the Bank of Canada will be able to present more new data and a full forecast.

"After [last week's] blowout GDP figures, we now see little reason for the BoC to wait before hiking interest rates again", Shenfeld wrote in a client note, adding that an increase will likely be accompanied by a statement "to remind Canadian dollar bulls that they will be very patient on further hikes".

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