Bank of Canada raises key interest rate by a quarter point to 1%
September 8, 2010
– Canada's central bank raised a interest rate on Wednesday for the third consecutive time.
The Bank of Canada increased its benchmark rate by a quarter point to 1 percent. In June, Canada became the first Group of Seven nation to raise interest rates since the global economic crisis. It raised rates again in July.
The bank said borrowing conditions remain exceptionally stimulative and said any further rate hikes will need to be carefully considered considering the unusual uncertainty surrounding the outlook.
The bank expects the economic recovery in Canada will be slightly more gradual than it projected because of a weaker outlook in the U.S.
The Canadian dollar jumped 1.09 to 96.51 US cents after the announcement.
Most economists had expected bank governor Mark Carney to lift the rate but some thought recent weakness in the U.S. would mean Carney would take a break from increases. Carney had previously said there is no longer a need for low emergency rates.
The U.S. Federal Reserve, by contrast, seems far from ready to tighten monetary policy, but Canada withstood the global economic crisis better than most developed countries. There was no mortgage meltdown or subprime lending crisis in Canada where the financial sector is dominated by five large banks.
Canada has made up nearly all the jobs lost during the recession. The unemployment rate edged up one-tenth of a point to 8 percent in July, the first time the rate has risen in almost a year.
Last week, Canada reported that the country's gross domestic product rose 2 percent in the second quarter, down from 5.8 percent growth in the first quarter.
Royal Bank Chief Economist Craig Wright, CIBC Chief Economist Avery Shenfeld and Toronto-Dominion Bank Chief Economist Craig Alexander expect Carney will now pause until 2011 before raising rates again.
Wright said it would be prudent for the bank to wait and see how the global economy recovers.
"There's a solid case for a pause. If they are that uncertain than it makes sense," Shenfeld said.
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