Bank of Canada hikes interest rates

The Bank of Canada boosted its key interest rate by one-quarter of a percentage point Wednesday, pushing the target for the overnight rate to one per cent.

The country's central bank said the Canadian economic recovery has been uneven so far. But improved personal and corporate spending in the previous quarters and into the future was enough to justify an increase now to the central bank's key lending rate.

"Going forward, consumption growth is expected to remain solid and business investment to rise strongly," the bank said in a statement.

The Toronto Stock Exchange closed down 59.66 points, or 0.5 per cent, at 12,042.32, while the Canadian dollar closed up 0.97 of a cent US at 96.39 cents on Wednesday.

Most of the country's big banks followed suit by raising their prime lending rate by 25 basis points to 3.00 per cent, effective Sept. 9.

Rate breather

Wednesday's rate increase could be the last one Canadians will see for some time, the Bank of Canada indicated. That is because the gross domestic product has grown a little more slowly than the bank originally anticipated, and inflationary expectations are broadly in line with forecasts.

Canada's GDP grew by two per cent in the second quarter of 2010, down significantly from the 5.8 per cent clip in the January-to-March period.

The central bank said it will take a wait-and-see attitude towards further increases.

"Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook," the bank said.

Analysts weigh in

Some economists now figure the bank will stay on the monetary sidelines for at least the next six months.

"The odds favour the Bank of Canada pausing for sometime," TD Economics said. "And [we] do not anticipate another tightening before March of next year."

Other stock experts agree.

"The Bank of Canada did signal that they are cautious, given the weak U.S. economic situation," said Kate Warne, Canadian market strategist at Edward Jones, in St. Louis, Mo. "Therefore, I would expect that they are likely to stay on hold until there is more clarity about how strong global growth is."

Still other bank watchers, are not as convinced the Bank of Canada will stay inactive on the interest rate front.

"While we had been expecting the Bank to move to the sidelines for a spell, it appears it will take a deeper slowdown in domestic spending … to prompt them to stop raising rates," said Doug Porter , an economist with BMO Economics.

In the mortgage market, however, other financial factors affect whether those rates will raise in response to the bank's move.

"We're seeing two forces at work here," said Bill Maurin, chief financial officer of Meridian Credit Union, based in central and southern Ontario. "One is the [Bank of Canada] trying to slowly raise interest rates to curb inflation. Second, you have a lot of investment going into the bond market. This is pushing up the demand and prices of bonds and adding to the pressure on interest rates."