Bank of Canada raises benchmark rate

The Bank of Canada did the expected and raised its benchmark interest rate to 0.5 per cent on Tuesday, the first hike in nearly three years.

The bank moved its overnight lending rate 25 basis points higher, up from 0.25 per cent.

In doing so, Canada became the first G8 nation to raise rates after an aggressive round of cuts at the start of the recession in 2008, and after most developed economies showed signs of rebounding in 2009.

"The bank has decided to raise the target for the overnight rate to one-half per cent and to re-establish the normal functioning of the overnight market," the bank said in a statement.

The rate has been frozen at 0.25 per cent since April 2009, when the bank made a "conditional commitment" to keep rates at such an extraordinary low as long as economic circumstances continued to warrant the shot in the arm of easy lending.

After recent reports showed Canada's economy expanded at a 6.1 per cent annual pace in the first quarter, and created a record 109,000 jobs in April alone, the bank decided the time was right to act.

"He's taking his foot off the gas, he's not slamming on the brakes," RBC chief economist Patricia Croft said.

It's the first time Mark Carney has opted to raise interest rates since he became the governor of the Bank of Canada more than two years ago. 

'He's taking his foot off the gas, he's not slamming on the brakes' —Economist Patricia Croft

There were concerns that the deteriorating economies of Europe and elsewhere might compel the bank to stand pat, but the bank clearly paid more attention to undeniable signs of local strength.

"The domestic case for higher rates simply overwhelms concerns about the international backdrop," BMO chief economist Doug Porter said.

Further hikes possible

The bank's next scheduled meeting to discuss rates is July 20. Given how long the rate has been so low, many economists expect several small rate hikes in a row to follow. But in its policy statement Tuesday, the bank hinted that's not necessarily the case.

"In most advanced economies, the recovery remains heavily dependent on monetary and fiscal stimulus," the bank said in its statement.

"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," it added.

Indeed, the bank left the door open to hold at 0.5 per cent, or even retract if the global situation deteriorates, Croft said.

"It's not a given that another hike is coming on July 20, as the bank made it clear that raising rates is going to be very slow and very cautious," she said.

Canada's major chartered banks reacted quickly to the news, increasing their prime rates by the same 25 basis points.

Within hours of the Bank of Canada's announcement, Royal Bank and TD Bank boosted their prime lending rates to 2.5 per cent, from 2.25 per cent, effective Wednesday. Bank of Nova Scotia and Laurentian Bank quickly matched that rate increase, and Canada's other major lenders are expected to follow suit.