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Bank of Canada hikes key interest rate

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Bank of Canada hikes key interest rate

Last Updated Tue, 18 Oct 2005 19:07:58 EDT

CBC News



The Bank of Canada pushed up its key interest rate by a quarter of a percentage point Tuesday morning and signalled that more rate hikes are coming.


The widely expected increase in the central bank's overnight lending rate, now at 3.0 per cent, was the second in as many months.


"Given that the Canadian economy now appears to be operating at capacity, some further reduction of monetary stimulus will be required," the Bank of Canada said in a statement announcing the rate hike. That phrase, which was not in September's statement, means higher interest rates are on the way.


"The text accompanying today's rate announcement was effusively hawkish, all but guaranteeing a string of further rate increases," TD Bank economist Eric Lascelles said.


News that further rate hikes are likely gave an immediate firming of the Canadian dollar, which had been trading as low as 84.18 cents US prior to the rate announcement. At the close of trading, the loonie managed to eke out a slight gain, rising 0.05 cents to 84.86 cents US.


The Bank said high energy prices will cause inflation to average close to three per cent until the second half of next year, when the so-called "headline" inflation rate is expected to ease to two per cent.


The Canadian economy, it said, "will continue to operate at about its production potential through 2007."


Chartered banks quickly began boosting their prime lending rates by a quarter of a percentage point to 4.75 per cent. Lines of credit and variable-rate mortgages suddenly became a little more expensive to maintain, while some banks also hiked what they charge for fixed-rate mortgages.


Mortgage broker Dave Providenti said people with variable-rate mortgages were feeling vulnerable.


"We've certainly seen an increase in people who are inquiring about fixing their mortgages, those who are currently in variable rates. We're getting a few more phone calls from folks who are wondering if they should lock in."


The next interest rate announcement from the Bank of Canada comes on Dec. 6. Many economists are expecting another quarter-point rate hike then.


"Today's statement ups the odds that the Bank of Canada will be back again with a 25 bp (basis point) 'Christmas present' in December," CIBC World Markets economist Avery Shenfeld said in a morning commentary.


Although the Bank of Canada has raised rates only three times in the past year, for a total of three-quarters of a percentage point, some analysts said Canadians who have maximized their mortgages may find even another quarter point is too much to bear.


"In about 95 per cent of the cases over the past 50 years, you would have been better off with a short-term variable rate," said Marc Lévesque, a senior economist with TD Securities in Toronto.


"But you have to be able to stomach the fluctuations in those interest rates. You have to be able to sleep at night."

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Lock in to your mortages now, people.......it ain't going back down.

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