Bank of Canada Hikes Interest Rate to 1.50%, CAD Climbs in Response

Image of daily change for major currencies

The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent.

The Bank of Canada is widely expected to raise its trend-setting interest rate today for the first time in six months. This effect is now judged to be larger, given mounting trade tensions. As we progress into the third quarter, the steel, aluminum, and proposed auto tariffs will remain a catalyst for movement between the loonie and the dollar.

"We felt it appropriate to set aside this risk and make policy on the basis of what has been announced", he said.

As in April, the projection incorporates an estimate of the impact of trade uncertainty on Canadian investment and exports. The tariff fight, the bank estimated, will shave almost 0.7% from Canada's economic growth by the end of 2020.

Money markets see a almost 70 per cent chance of further Bank of Canada tightening by December.

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The bank says persistent trade uncertainty and Canada's tariff fight with the United States will shave almost 0.7 per cent from economic growth by the end of 2020 - but it predicts the blow to be largely offset by the positive impact of higher oil prices. The BoC believes U.S. steel tariffs will be felt in the second half of 2018 but could take longer.

"This U.S. dollar move offsets, and even more so, the somewhat hawkish BoC hike", said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in NY.

The bank said US steel and aluminum tariffs imposed in June and retaliatory countermeasures by Canada in July would trim exports, imports and economic growth, and boost inflation, but strong global demand and higher commodity prices were offsetting the tariff headwind.

The Bank of Canada also has its eye on how widening global trade disputes, including an intensifying battle between the US and China, will affect the world's economy.

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