Rate Disclosed By Bank Of Canada

Rate Disclosed By Bank Of Canada

(Kitco News) - The Bank of Canada raised its key interest rate to 1.25% on Wednesday, hiking rates for the third time since last summer.

The rate increase by the Bank of Canada is expected to prompt Canada's large banks to raise their prime lending rates, a move that will drive up the cost of variable-rate mortgages and other variable-interest rate loans.

The rate of potential growth continued to be the main concern for the central bank. However, it cautions about the substantial improbability linked to the possible changes of policy by the USA, which is its major dealing partner.

The price of oil, one of Canada's major exports, rose ahead of the release of US petroleum data that was expected to show a ninth straight weekly drawdown in crude inventories.

The central bank has increased the trend-setting rate to 1.25 per cent, up from one per cent. Trade-policy uncertainty is expected to hold back exports by 0.7% by 2020, the bank said.

"Recent data have been strong, inflation is close to target and the economy is operating roughly at capacity", the Bank of Canada said.

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Canadian government bond prices were mixed across the yield curve, with the two-year up 2 Canadian cents to yield 1.764 percent and the 10-year falling 15 Canadian cents to yield 2.19 percent. Growth in advanced economies is projected to be stronger than in the Bank's October Monetary Policy Report (MPR). "It must raise rates to head off potential inflationary problems and slow growth in household debt, but at the same time, sustain existing asset prices and avoid a consumption crunch that could derail the economy". The increase followed hikes in July and September.

The Bank of Canada said the unknowns of the NAFTA's renegotiation are continuing to weigh on its forecast and have created a drag on investment and exports.

Economist Frances Donald with Manulife agrees with that assessment, telling CBC News in an interview that while the market was expecting as many as three hikes this year, the situation is fluid.

The central bank estimates the economy grew 3% previous year, and is expected to expand 2.2% in 2018. "That should pose some questions to all those rate hikes priced into the market", said Adam Cole, chief currency strategist at RBC Capital Markets in London.

The gap between the two-year yield and its US counterpart widened by 2.9 basis points to a spread of -27.4 basis points, its widest since December 15.

"The challenge for the BoC will be to weigh these risks against incoming data-data that we expect to support a case for higher interest rates throughout the year", they wrote, outlining an expected 75 bps worth of tightening over the course of 2018.

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