Interest rates expected to edge up

Bank of Canada announcement at 9 a.m. ET

Last Updated: Monday, July 19, 2010 2:23 PM ET
CBC News

The Bank of Canada, weighing strong domestic growth against weakness internationally, will likely raise its key lending rate by another quarter of a percentage point Tuesday morning, economists say.

That would bring the central bank's overnight lending rate to 0.75 per cent.Bank of Canada governor Mark Carney is shown during a panel discussion last month at the International Economic Forum of the Americas in Montreal. (Graham Hughes/Canadian Press)
Increases in the overnight lending rate generally lead directly to increases in lines of credit rates, variable-rate mortgages and other demand loans.

All 12 primary securities dealers expect the central bank to announce a quarter percentage point hike. A survey of 20 economists by Bloomberg found similar unanimity.

If that rate hike does materialize, it would be the second straight hike by the bank, which had left its benchmark lending rate at a rock-bottom 0.25 per cent for more than a year to provide a shot in the arm to a struggling economy.

Canada's central bank was the first in the G7 group of industrialized economies to raise interest rates since the global financial crisis began unfolding.

Canada's economy faring better than most
Recent data has shown the Canadian economy continuing to shake off the effects of the recent slowdown.

The most recent employment report issued showed that Canada created 93,200 jobs in June, far above economists' forecasts. The Canadian economy has now recouped almost all of the jobs lost in the recession.

The unemployment rate fell to 7.9 per cent — its lowest level in more than a year.

Bank of Canada surveys released last week suggest that Canadian businesses remain optimistic as far as sales and hiring are concerned.

"With solid employment growth powering consumers, and business investment now surging, Canada's domestic economy still looks solid," noted Bank of Montreal economist Benjamin Reitzes.

The international economic recovery has been more uncertain. Recent U.S. and European economic data, for instance, has been tentative at best.

Analysts say that weakness should be enough to keep the Bank of Canada from aggressively raising rates.

TD Bank economist Grant Bishop agrees that the central bank will hike by a quarter point Tuesday, but thinks the bank will underscore "the economic uncertainties in its communiqué, leaving an open door to a pause on rate hikes if conditions warrant."

A survey of 20 economists by Reuters finds that most expect the central bank's key lending rate will be at 1.25 per cent the end of the year, meaning that a couple of additional small rate hikes may be in the offing after Tuesday's, along with a pause or two.