Canada Becomes First To Raise Interest Rates

With GDP growth rates nearly double that of the US, and high demand for its rich commodity resources, the Central Bank of Canada decided to raise interest rates. …

With GDP growth rates nearly double that of the US, and high demand for its rich commodity resources, the Central Bank of Canada decided to raise interest rates. The move makes Canada the first of the G7 countries to raise interest rates, and underscores Canada’s growing economic strength. See the following article from Money Morning for more on this.

The Bank of Canada (BOC) today (Tuesday) raised its key interest rate, becoming the first Group of Seven (G7) central bank to raise rates since the global recession started in 2007.

Indeed, Canada with its rich cache of commodities is ahead of most other developed economies still struggling to emerge from the economic downturn. In fact, it is one of the “winners” in the “commodities new world order” recently outlined by Money Morning Contributing Editor Martin Hutchinson.

“The principal winners among the world’s ‘rich’ economies are Canada and Australia – each of them well-managed, financially wealthy countries with abundant commodity resources,” said Hutchinson. “Australia has particular strategic importance as supplier of iron ore and coal to China, while Canada is even more crucial to U.S. oil security through the Athabasca tar sands.

“Americans have been prone to sneer at Canada’s capabilities for the last two decades,” he added, “but the shoe is on the other foot now that Canada’s superior economic management is meshing with Alberta’s oil resources and British Columbia’s magnificent mining sector.”

The BOC raised its benchmark overnight rate by 0.25 percentage points to 0.50%. The rate had been at a record low 0.25% since April 2009. The bank also re-established normal functioning of the overnight market, including reverting to a 0.50 percentage point operating band for the rate.

The highly anticipated decision was tempered by a statement from the bank that said further moves would be determined by future growth in Canada as well as external global economic developments.

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“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,” the BOC said.

The rate hike is Canada’s first since July 2007 and the first under the watch of Governor Mark Carney, who took over the top job in February 2008. The bank’s next decision on rates will come on July 20.

The cautious tone of the bank’s statement illustrates the dilemma confronting the country’s policymakers, which is how to weigh Canada’s strong domestic economy against concerns about an “increasingly uneven” global economic recovery punctuated by a spiraling Eurozone debt crisis.

The bank said Canada’s recent growth and inflation have been “largely as expected” while noting the global economic picture is clouded by uneven conditions across various economic zones.

“The consensus is that the statement was rather cautious on future Bank of Canada action. The message is that this is not necessarily the start of an aggressive tightening campaign.” Brendan Luxton, head of foreign exchange trading at Scotia Capital in Toronto told the Financial Times.

While Canada became the first G7 country to raise borrowing costs since the global meltdown, it joined a small group of other less-developed economies that have already moved to tighten the reins on loose credit policies.

Brazil, Malaysia and Peru have already raised rates this year while India’s central bank boosted its reverse repurchase rate for the second time in five weeks on April 20.

Australia’s central bank said it would leave its benchmark interest rate unchanged at 4.5% after six increases since October. The bank hinted that it may keep rates steady in coming months as it continues to assess the impact of its previous moves – the most aggressive rate increases in the Group of 20 (G20).

Canada has been cashing in on rising demand for copper, gold, wheat and oil from emerging economies such as India and China. The country is the world’s second-biggest exporter of natural gas, and sits on the largest pool of oil reserves outside the Middle East.

The Organization for Economic Cooperation and Development (OECD) pushed Canada to raise rates “without delay” on May 26, as it predicted the country’s growth will lead the G7 this year at 3.6%

The Bank of Canada said in April that inflation would be slightly higher than its 2% target for the next 12 months. Inflation accelerated to 1.8% in April from 1.4% in March.

Canada’s output in the first quarter grew at a 6.1% annualized rate, about twice that of the U.S.

This article has been republished from Money Morning. You can also view this article at
Money Morning, an investment news and analysis site.


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