BANK of CANADA RAISES INTEREST RATE

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The Bank of Canada did as expected yesterday and announced it is increasing the target for the overnight rate by 0.25% to 0.75%. There was some debate earlier in the month whether the central bank would actually continue increasing interest rates, but after the strong job report that was released mid-month announcing that a record number of jobs were created in June, it became apparent that Bank Governor Mark Carney, now had strong justification to increase rates again.

Some key items in the release included:

Globally
Global economic recovery is proceeding but is not yet self-sustaining
Greater emphasis on balance sheet repair by households, banks, and governments around the world is expected to reduce global growth then the Bank originally believed back in April
The response to the European debt crisis, or Greece’s debt crisis, has reduced the risk of it blowing out of proportion, but it will slow down global growth
US consumer demand is increasing but is still not driving growth
In Canada
Economic activity in Canada is proceeding largely as expected mainly due to government stimulus and consumer spending
Housing activity is declining markedly from high levels, as the Bank believes that ultra low interest rates brought forward housing demand from this year into late last year and earlier in 2010, so we could see a continued slow down through the rest of the year
Despite the latest jobs report for June 2010 stating that employment growth has resumed, business investment still has resumed to previous levels as there is so much global uncertainty at the moment
The Bank of Canada expects economic recovery in Canada to be slower than originally thought in April, and is now expected as follows:
2010: 3.5%
2011: 2.9%
2010: 2.2%
Inflation seems to be under control, and is expected to remain around the target 2%, however, they will keep an eye on whether HST introductions in BC & Ontario will lead to inflation in the short term
The economy is expected to recover to full capacity towards the end of 2011 rather than Q2 2011 as thought in April
They then closed the announcement with a warning that:

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

This means that another rate hike at the next meeting on September 8th, 2010, is not guaranteed. They will have to see how the Canadian economy is fairing along with the rest of the world, and some economists believe they may ‘pause’ rate hikes to see the effects of previous increases thus far.

What this means for variable mortgage holders, is that your variable mortgage rates will increase by 0.25% tomorrow.

Keep in mind that the Bank of Canada’s key interest rate doesn’t directly affect fixed mortgage rates, they’re affected by bond yields, and after the last announcement we actually saw fixed mortgage rates come down as bond yields decreased.