Bank of Canada raises rates, might speed up pace of future hikes

OTTAWA (Reuters) - The Bank of Canada on Wednesday raised interest rates as expected and said it might speed up the pace of future hikes given the economy was running at almost full capacity and did not need any stimulus.

Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins listen to a question during a news conference in Ottawa, Ontario, Canada, October 24 2018. REUTERS/Chris Wattie

The central bank, which has now lifted rates five times since July 2017, also hailed the signing of a new North American trade pact it forecast would reduce economic uncertainty.

The bank tweaked its standard language on future hikes, dropping previous references to a gradual pace of tightening.

Senior officials said markets had misread the use of the word “gradual” to infer that the bank would only raise rates at every other scheduled meeting it holds to discuss policy. The bank announces rates eight times a year, on fixed dates.

“It’s possible the pace could be a bit faster but it’s also possible it could be a bit slower,” the bank’s senior deputy governor Carolyn Wilkins told a news conference, saying future moves would depend heavily on economic data.

The rate increase, by a quarter of a percentage point, took the bank’s overnight interest rate to 1.75 percent, still well below the “neutral” rate of 2.5 to 3.5 percent where monetary policy is neither stimulative nor accommodative.

The bank, noting the U.S. economy was “especially robust,” boosted its estimate of third-quarter annualized Canadian economic growth to 1.8 percent from 1.5 percent. Growth in the fourth quarter should jump to 2.3 percent, it added.

“The economy is running at its capacity and it is no longer needing stimulus. And so it’s our job to prevent the thing from overheating and creating inflation pressures down the road,” said Bank of Canada Governor Stephen Poloz.

The news helped push the Canadian dollar up to a one-week high of C$1.2969 to the U.S. dollar, or 77.11 U.S. cents, and opened the possibility of another hike on Dec. 5.

“They are teeing up another run at it in December ... They are signaling a more urgent sense that they have to get up to neutral quicker than the markets were pricing,” said Derek Holt, senior vice president of capital markets economics at Scotiabank.

Three major Canadian main street banks -- Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal -- all quickly announced they were raising their prime lending rates to 3.95 percent from 3.70 percent.

The central bank noted positive developments in two areas of potential risk. Trade uncertainty in North America will diminish after the United States, Canada and Mexico agreed on a new continental trade agreement on Sept. 30, it said.

It also noted households were adjusting spending as expected in response to higher interest rates and housing market policies. The bank has long fretted about Canadians’ ability to cope with higher borrowing costs.

On a more gloomy note, it said trade tensions between the United States and China were weighing on global growth and commodity markets and “could have a significant and lasting impact on the global economy.”

The bank said overall inflation should drop in early 2019 as the effect of temporary factors fades and then remain at around 2.0 percent - the mid point of its 1 to 3 percent target range - through the end of 2020.

With additional reporting by Fergal Smith, Nichola Saminather and John Tilak in Toronto; Editing by James Dalgleish and Tom Brown