June 1st, Paul Vieira, Financial Post
OTTAWA -- For the first time in nearly three years, the Bank of Canada on Tuesday hiked its key interest rate by 25 basis points to 0.50%, as the domestic economy rebounds strongly against the backdrop of an "uneven" global recovery.
However, it signalled in its accompanying statement there is "considerable uncertainty" in the economic outlook given fiscal and financial unrest in Europe. As a result, further rate hikes "have to be weighed carefully" against global and domestic developments.
"This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2% inflation target in light of the significant excess supply in Canada, the strength of domestic spending and the uneven global recovery," the central bank, led by governor Mark Carney, said.
That led some analysts to suggest there is no guarantee the central bank would raise rates again at its next scheduled meeting in mid-July.
"The July meeting is not a slam dunk," said Jonathan Basile, an economist at Credit Suisse in New York. "The downside risk is causing policymakers to lower the hawkish sails."
The statement's ambiguous, cautious tone led to a pullback in short-term bond yields and a US1¢ drop in the Canadian dollar. Douglas Porter, deputy chief economist at BMO Capital Markets, said it was as if the central bank was "almost bending over backward to indicate that this is not necessarily the start of a relentless campaign to crank rates higher."
Still, with the move, the Canadian central bank becomes the first among its Group of Seven peers to raise rates, and one of the few industrialized countries to do so. The last time the Bank of Canada raised its benchmark rate was in July of 2007.
The move signals higher borrowing costs for households and businesses that have loans tied to prime rates charged by chartered banks. (Prime tends to move in unison with the central bank's benchmark rate.)
The decision emerged a day after Statistics Canada reported the domestic economy reported its strongest quarterly performance in over a decade, as GDP expanded by a robust 6.1% in the three-month period ended March 31. The economy benefited from strong consumer spending, a robust goods-producing sector and an aggressive rebuilding of inventories by businesses.
There was a tug of war of sorts in the marketplace in the days leading up to Tuesday's decision about whether the Bank of Canada would pull the trigger and raise rates. A set of stronger-than-expected economic data, from retails sales to inflation, suggested a rate hike was warranted. Countering that, however, was market uncertainty over the spillover of fiscal problems in certain southern European nations, and the health of that continent's banking system.
In the end, the central opted to raise its key rate, and begin the process of withdraw extraordinary stimulus from the economy. But the Bank of Canada's statement explaining the rate hike went to some length to acknowledge the present risks to the global and domestic outlook.
"The global economic recovery is proceeding but is increasingly uneven across countries," the central bank said, noting the strong momentum in emerging economies and the "possibility" of renewed weakness in Europe.
The recovery in "most" developed economies remains "heavily dependent" on low interest rates and government spending, it added.
Read more: http://www.financialpost.com/news-sectors/story.html?id=3096853#ixzz0pcxzDvSr
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