Bank Signals Higher Interest Rates Only Weeks Away, as Dollar Soars
by Julian Beltrame, The Canadian Press
OTTAWA - The Bank of Canada signalled Tuesday it is poised to start raising interest rates in a matter of weeks, a move that will make borrowing costs higher on everything from car loans to mortgages.
Over the last few weeks, Canadians have already felt the impact of expectations that rates were due to rise - most major Canadians banks started hiking fixed-rate mortgage rates by as much as 0.85 per cent.
But with the central bank now saying it is prepared to move off its emergency 0.25 per cent overnight rate as early as June 1, the whole menu of variable and short-term rates are being brought into play.
"The one that will be affected is the prime lending rate... so the whole gamut will go up when the Bank of Canada raises its rate," said Bank of Montreal economist Michael Gregory. Those include variable-rate mortgages, lines of credit and short-term car loans, he said.
The bank is also risking sending the Canadian dollar into the stratosphere by moving significantly and robustly before the U.S. Federal Reserve moves off its own zero per cent interest rate policy.
The loonie soared within minutes of the central bank's 9 a.m. ET policy statement, which, while leaving the rate unchanged for now, made no secret of where it is headed.
The bank's governing council declared that with the economy and inflation growing faster this year than had been previously thought, there was no need to stay with its "conditional commitment" to leave rates unchanged until the end of the second quarter, or after June 30.
"This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions," the council wrote.
"With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus."
Hence, the council went on, it was withdrawing the conditional commitment.
The bank also said it was ending its key emergency lending instrument that helped inject liquidity into money markets during the crisis, which economists called a clear signal about the central bank's future intentions.
The dollar rose about 1.5 cents shortly afterwards, breaking through the parity ceiling with the U.S. greenback. It closed up 1.58 cents at 100.12 cents U.S.
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