Bank of Canada Increased the Rate: And What Next?

Not to our surprise, Bank of Canada increased its overnight target rate from 0.25% to 0.5% on the beginning of June. That confirms that our economy is slowly leaving turbulent waters of recession, so BoC is slowly abolishing the emergency rates.

High Flying by Michael Kain
High Flying by Michael Kain

There are reasons to believe more rate hikes are ahead. As Scotia Capital suggest in their latest newsletter, BoC keeps neutral bias to prevent market actors from premature preventive tightening. However, there are reasons to believe hikes will continue to hit the bottom of the standard rate range around 2.75% until the late summer 2011.

Financial innovations in Canada (revolving lines of credit and extended amortization mortgages for example) help consumers to offset rate hikes. In addition, the wage disinflation is considerably slowing down in Canada. Add sticky rates of core inflation, gap closing faster than predicted, improvements in funding conditions and the field for further hikes is open.

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