Bank of Canada Raises Key Interest Rate To 1.50%

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Bank of Canada delivers another hike, key interest rate rises to 1.5%

Governor Stephen Poloz said that while it was not easy for policymakers to set aside "all the talk" about trade, the bank hiked rates amid increasing confidence in its outlook, with Canada's economy firing on all cylinders despite the tensions.

The Bank of Canada will also release its updated economic projections today in its latest edition of its quarterly monetary policy report. In particular, the Bank is monitoring the economy's adjustment to higher interest rates and the evolution of capacity and wage pressures, as well as the response of companies and consumers to trade actions.

Scott Hannah says higher interest rates have also helped to cool down the country's real estate markets, helping future homeowners.

The bank says persistent trade uncertainty and Canada's tariff fight with the United States will shave almost 0.7 per cent from economic growth by the end of 2020 - but it predicts the blow to be largely offset by the positive impact of higher oil prices.

"This U.S. dollar move offsets, and even more so, the somewhat hawkish BoC hike", said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in NY.

"This should be consistent with a more firm pricing for another hike this year", said Alvise Marino, FX strategist at Credit Suisse in NY. However, it intends to continue with its gradual, data-dependent approach.

The Bank of Canada raised its benchmark interest rate by 25 basis points to 1.50 per cent, the fourth hike since last summer. It's expected to settle back down to 2% in the second half of 2019. 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.

"There are worries ahead, growth hasn't been stellar, but the backdrop has been just good enough for the Bank of Canada to nudge rates a quarter point higher".

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