OTTAWA — The Bank of Canada has raised its interest rate for the second time in less than two months in an effort to adjust to the unexpected force of the country’s economic momentum.
Wednesday’s overnight lending rate hike to one per cent marks its second quarter-point increase since July, and comes less than a week after the latest data for economic growth showed an impressive expansion of 4.5 per cent for Canada in the second quarter.
That April-to-June performance followed surprisingly healthy growth in the first three months of 2017 and easily exceeded the Bank of Canada’s projections.
“Recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly-based and self-sustaining,” the bank said in a statement that accompanied the announcement.
The bank said solid employment and wage growth have led to strong consumer spending, while the key areas of business investment and exports have also showed improvements.
The loonie soared on the news, jumping more than a cent to over 82 cents US, up from Tuesday’s average price of 80.83 cents US. The dollar is now up about three per cent over the past month and up 14 per cent from its low of roughly 73 cents in April.
The rate increase also caught many experts by surprise.
Analysts had widely anticipated the bank would hold off Wednesday and only hike a second time at its policy meeting in late October.
Some expected it to wait because an early move could drive up the dollar and put exports at risk. Another argument hinged on the fact the bank hadn’t clearly telegraphed the increase to markets, as it had before the July increase.
In the weeks before the July hike, officials, including governor Stephen Poloz, used public statements to signal a rate move was on the way.
This time, the decision was preceded by weeks of silence.
TD senior economist Brian DePratto said the bank appears to be sticking to its previous statements that it would be guided by data.
“So, if we do get things coming in extremely hot, they may react to that without necessarily needing to be super explicit in their communications strategy,” DePratto said.
“I think that’s a shift and I think that’s something that analysts are going to have to adapt to.”
In the years that followed the 2008 financial crisis, experts have grown accustomed to central bankers providing a bit of warning — or so-called forward guidance — ahead of rate decisions, said Manulife senior economist Frances Donald.
But she noted it hasn’t always been this way.
“Today, for me, was a signal that governor Poloz is more a fan of old-school central banking,” Donald said.
Looking ahead, the bank’s statement only offered a few clues about future decisions.
It insisted they would not be “predetermined” and will be guided by economic data releases and financial market developments.
The bank pledged to pay particular attention to the economy’s potential, job-market conditions and any risks for Canadians from the higher costs of borrowing.
“Given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates,” the statement said.
In making what many described as a “hawkish” move, the bank made a point of also highlighting potential negatives in the brief, 400-word statement.
The bank underlined concerns around geopolitical risks and uncertainties related to international trade and fiscal policies. It also predicted the rapid pace of economic growth to moderate in the second half of the year.
DePratto said the bank’s downside warnings and its assertion that future rate decisions aren’t already mapped out were attempts to dial down the market impacts of Wednesday’s move.
The question now is: where does Poloz go from here?
Economists highlighted a line in Wednesday’s statement that said the increase removed some of the “considerable” monetary policy stimulus already in place.
“Certainly, I think today’s statement puts a little more weight on the argument that you could see another increase sooner rather than later — and certainly sooner than us and, I think, markets were expecting as recently as two weeks ago,” DePratto said.
But in trying to predict the future, there’s a range of factors to consider, CIBC’s Andrew Grantham said in a research note to clients.
“If the economy cools down from its current blistering pace as we expect in (the third quarter), the Bank of Canada will have reason to take a slower approach in rate hikes,” he wrote.
Before making another move, Grantham expects Poloz to wait and see whether the U.S. Federal Reserve hikes its interest rate in December. That meeting, he added, will come a week after the Bank of Canada’s December rate announcement.
In its statement, the bank also said headline and core inflation have seen slight increases since July, largely as expected. It noted, however, that upward pressure on wages and prices remained more subdued than historical trends would suggest, a phenomenon that has also been seen in other advanced economies.