Bank of Canada raises interest rate to 0.5 per cent

Bank of Canada raises interest rate to 0.5 per cent

01/06/2010 2:51:23 PM

CTV.ca News Staff
The days of record low interest rates in Canada appear to be coming to an end, as the Bank of Canada announced Tuesday its first interest rate increase in three years.


The central bank hiked its overnight lending rate from 0.25 per cent to 0.5 per cent, an increase that was quickly matched by major banks.

BNN's Michael Kane told CTV's Canada AM that GDP numbers released Monday were likely "the final nail in the coffin for record low interest rates."








Those figures showed the country's gross domestic product expanded by a whopping annual rate of 6.1 per cent in the first three months of this year -- the largest quarterly increase in more than a decade.

Indeed, the statement from the Bank of Canada suggested those results figured prominently in its decision.

"Activity in Canada is unfolding largely as expected. The economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth has resumed," the statement read.

"...In this context, the Bank has decided to raise the target for the overnight rate to 1/2 per cent and to re-establish the normal functioning of the overnight market."

The bank's optimism was tempered by worries about "spillover" from the European debt crisis -- which, it noted, has so far been limited -- and said there remains "considerable uncertainty" about an "increasingly uneven" global recovery.

The Bank of Canada's rate hike is the first among the Group of Seven wealthy nations since the global recession began two years ago.

Prime lending rates, which banks extend to their best customers, quickly followed the Bank of Canada increase.

The TD Bank was the first to announce a quarter-point hike in its prime lending rate to 2.5 per cent, effective Wednesday. The Royal has followed suit and all the other major banks are expected to announce the same increase to their primes, which influence variable rate mortgages and lines of credit.

Short-term, variable mortgage rates will also likely rise, but longer-term fixed mortgage rates -- which are more influenced by the bond market -- are expected to remain unchanged for now.

The rate hikes may not stop here. Many expect further tightening, with some predicting the overnight lending rate could rise as high as 1.5 per cent by the end of the year. The central bank tried to keep such expectations in check in its statement.

"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," it said.