Bank of Canada raises benchmark interest rate to 1.25%


"However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook", the Bank of Canada said in the press release.

The Canadian dollar closed at an average trading value of 80.48 cents United States, down 0.04 of a USA cent, recovering from greater losses earlier in the session after the central bank said it would raise its key interest rate target by a quarter of a percentage point to 1.25 per cent.

The bank said it expects global economy to continue to strengthen, with growth expected to average 3.5 per cent. Previously the bank was anticipating 2.1 and 1.5 per cent growth. Further, the central bank said it is monitoring the extent to which stronger demand and investment are boosting the level of potential gross domestic product, or the amount of growth that can unfold before inflationary pressures are triggered.

Ever since President Trump won the United States presidential election in November, this was the first release of the current predictions and extensive economic valuation by the Bank.

"Today's rate hike was a rear-view mirror move, but the Bank of Canada hints that the view out the front window isn't quite as sunny". Exports have been weaker than expected although, apart from cross-border shifts in automotive production, there have been positive signs in most other categories. The level of business investment is expected to be 2% lower by 2020 than what would otherwise be the case due to trade-policy uncertainty, the Bank of Canada estimated. By making NAFTA risks so prominent in this Statement, rate hike odds will now ebb and flow with the negotiations, even moreso than earlier.

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Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity.

At the very least, the drama around NAFTA may give the central bank some pause, Bank of Montreal economist Robert Kavcic said. The Bank expects CPI inflation to fluctuate in the months ahead as various temporary factors (including gasoline and electricity prices) unwind.

The decision was widely expected, as market odds projecting a rate hike were close to 90% prior to the announcement.

The claim alleges the banks manipulated the Canadian dealer offered rate - which reflects what rate contributors are willing to lend to corporate clients using an instrument called a bankers' acceptance - from at least August 9, 2007, to June 30, 2014.

"Governing council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation", the bank said.