Bank of Canada boosts overnight lending rate

With the hike in key interest rates, a mixed message from the markets is on the rise as well, as some investors believe this will be the last increase until 2011, largely due to the U.S.'s struggle to recover from the recession.

CTV News Channel: BNN's Mark Bunting on the hike

The Bank of Canada continues to stand alone among central banks in raising key rates, which shows confidence in Canada's economy due to a rise in employment and consumer and business confidence.

CTV News Channel: Derek Burleton, economist

The vice-president of TD Bank Financial Group says the hike was expected, but Canada is well on track to an economic recovery. He says there are signs the U.S. could slip back into a double-dip recession, which could have a negative impact on Canada's economy.

CTV News Channel: BNN's Frances Horodelski

A correspondent with the Business News Network discusses market reaction to Bank of Canada governor Mark Carney raising the overnight lending rate a quarter percentage point.

CTV News Channel: Douglas Porter, BMO

The deputy chief economist at BMO says this announcement is important largely because we've seen a slowdown in the U.S. and Canadian economy, and there has been a lot of debate as to whether it's the right time to raise rates.

CTV News Channel: BNN's Michael Kane on the BoC

The Bank of Canada has decided to boost the key overnight lending rate by 0.25 per cent to an even one per cent, despite an ambiguous economic situation.

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The Bank of Canada is seen in Ottawa on Wednesday Sept. 8, 2010. (Sean Kilpatrick / THE CANADIAN PRESS)

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CTV.ca News Staff

Date: Wed. Sep. 8 2010 8:41 PM ET

Bank of Canada governor Mark Carney raised the overnight lending rate a quarter percentage point on Wednesday morning, in line with most analysts' expectation.

Carney raised the trend-setting rate from 0.75 per cent to an even 1 per cent.

The decision marks the third straight month that the central bank has boosted the rate, which was set at a rock-bottom 0.25 per cent during the recession.

The overnight lending rate affects short-term borrowing, such as variable-rate mortgages and some lines of credit.

The steady rise over the last few months suggests the Bank of Canada sees Canada's economy rebounding and no longer feels interest rates need to be at virtually zero in order to stimulate recovery.

In a statement Wednesday, the central bank said the economy is recovering but still faces major challenges.

"The global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies," the statement said.

"In the United States, the recovery in private demand is being held back by high unemployment and recent indicators suggest a more muted recovery in the near term."

The statement went on to say that economic activity in Canada was slightly below expectations in the second quarter and the bank now expects the economic recovery to be slightly more gradual than it projected in July.

BNN's Michael Kane said there is a lot of uncertainty around the future economic direction Carney will take.

"The majority of experts surveyed by BNN predicted an interest rate increase by the Bank of Canada," Kane told CTV's Canada AM on Wednesday.

"The future is less certain. The general feeling seems to be that the Bank of Canada will keep rates on hold until there are clear signs that the economy in the United States is picking up."

Canada's economy has shown recent signs of ongoing struggle.

Statistics Canada data released last week said Canada's gross domestic product rose 2 per cent in the second quarter, short of the bank's prediction of 3 per cent and sharply down from the 5.8 per cent jump in the previous quarter.

July's jobs numbers saw unemployment rise slightly to 8 per cent, and summer real estate numbers showed a significant cooling in the housing market.

BMO economist Douglas Porter said poor housing sales and less spending by Canadians is still making for a fragile economy -- and higher borrowing costs wouldn't help improve the situation.

With files from The Canadian Press

Comments are now closed for this story

pm
said

I am sooooooooooooo glad I have no loans and never will. I live within in my means and proud of it. People just have to learn how to spend less. If want something but do not have the money I wait 'til I saved enough to buy it and if it still there next week or whenever then I buy it.

Quiet Rhythm
said

Im not actually a guy...and the comment was partially a sarcastic remark to the raising interest rates, HST, etc.

Adrian from Hamilton
said

The US, UK, Iceland etc kept interest rates too low in 2002 - 2003 - 2004 ... resulting in the crash of 2007 - 2008. If Canada keeps interest rates too low in 2010 - 2011 ... Canada will have a similar crash in 2015 - 2016. Better to take some minor pain now than to go through a major disaster 5 years down the road.

Winnie
said

I'm in N.S and I don't think this was the time to put hst up 2 cents, it stops people from spending. Just because the provincial government needs money and wants to line their pockets, why should we and the economy now have to suffer, doesn't make sense. N.S, economy was doing well before. See what happens now. Our fed, gst going down 2 cents helped the ecnomy some in Canada.

R from Etown
said

I'm guessing that the upset people are either just realizing they paid too much for their house, racked up the credit card too high or are already at their monthly spending maximum but forgot to SAVE some of their money when the boom rolled in. We need this correction guys...like it or not. Consumers are out of control! How many of us are up to the eyeballs in debt and slaves to the dollar and our jobs? Do you wish the same debt curse on your kids? Now put down those fancy new Nikes, you dont NEED a new car and I'm sure the TV can wait until you SAVE the cash to buy it. You'll get a better interest rate on it I'll bet.

TLC
said

What's surprising to me is that so many people are outraged by this. It was bound to happen, we were warned ahead of time, and history really does repeat itself.
We do not make a lot of money in our home however, my husband and I had decided a few years ago that we would set a small amount of money aside per month into a savings account. Though we have had to "dip" into it a few times, it has been helpful as we didn't have to put something on credit.
I also decided to find ways to make extra money so that that money goes directly towards our credit card and LOC debt. When you do that, and be disciplined enough not to spend it, you will see those numbers go down. The other advantage is, should you lose that job, you were not actually "living" on that income.
We have also managed to put a small amount of extra money towards our mortgage. When we first got our mortgage the interest rate was high and so were the payments, what we decided when we renewed was to keep the payments the same even though the rates came down. This little bit extra has made a huge difference in our mortgage balance!
I wish I had been taught at an early age how to better manage my money, and like most folks, we don't have much to manage so we always threw our hands up in the air. However, a few little sacrifices here and there have helped us feel like we're on the right track! If we can do it, most of you can too. Good luck!

Tyler
said

The rate should be much higher. Many of you have it backwards, any economy prospers from saving, credit and investment and production, not from spending and borrowing.

Ron
said

We are in a mess & it is only going to get worse. Who is to blame? Greed! The Politicians for selling us out, the Bankers for not caring if we are over extended, & the general populace for getting used to living on credit.Now Vancouver has become a City for the rich.Now Economists are saying house prices are going to fall to the levels of the 1980'.Too bad for the average Joe & Mary six pack!The destruction of the Middle Class in Canada is nearly complete!

Jeff
said

If you are worried about a .25% base point increase, you are leveraged to the hill. With the BoC expecting rates to hit 3-4 % in the next year or two as being 'netural', if you are balking now you will be crying loud and hard then.Only people who are leveraged too the hill will have the most impact... what the BoC is saying to these people stop getting in over your head with debt...

David
said

To the guy who said he's now going to "live in a cave" .. well, you'll have to decorate that cave, not to mention thinking about renovations & improvements to increase the value of that cave once you think of selling it. .. so, off to IKEA you go!

And to the guy who said, "we're heading into a Depression, hold on tight" .. ah, maybe a little bit of evidence and/or documentation to back up such a broad, sweeping statement might be in order. Some of the lack of education or insight behind some of the comments you see here is mind blowing. .. Not opening your mouth or keeping your bored hands off the keyboard is sometimes the best option!!

Cheers.

Slewhigh Yendick
said

Whew !!! Good thing I didn't borrow any money last night .....

Mike F.
said

I agree with the rate increase, eventually, with all the government debt out there, rates are going to have to rise, the Bank of Canada raising rates slow and gradual will avoid larger increases, all at once that people will not be able to handle. There is too much cheap money out there right now with these historically low rates, leading some people to get in over their heads, borrowing and spending recklessly, these increases will hopefully curb some of these people from qualifying for more and more credit and getting in over their heads, resulting in a credit crisis that the US is now dealing with. As well, with a higher rate, it leaves the Bank of Canada some maneuvering room should there be a need to cut rates again in the future. With the US at .25%, should things take a further turn for the worse, how much maneuvering room does the US have in cutting rates? Seems to me that so far, the Bank of Canada has avoided what has happened in the US and other countries, I have confidence they know what they are doing, for once, Canada has become a leader, not a follower, lets keep it that way, other countries are looking at Canada as a model for good financial management.

viral venus
said

I would be OK with this except that banks always raise borrowing rates immediately but take their sweet time on increasing savings rates. Case in point - the bank raised my variable mortgage rate and line of credit rate by .5% to reflect the last 2 increases at their earliest legal opportunity however they raised my savings rate by barely .20 % in the same time period which is not at all reflective of the change. It is the spread between borrowing and saving rates that is the scam that allows banks to gouge us on borrowing and cheat us on savings even if we are great customers. I have the best possible credit rating and I am receiving their most favourable rates on all borrowing and still they never delay or forgoe an opportunity to increase my cost of borrowing without equally improving my return on regular savings. Is there some way the government could think about regulations on the spread between rates for the multitude of us who have both savings and borrowing? Of course if there are extra risk factors about the borrower there could be guidelines to justify a larger spread.

Northern Princess
said

Jordan and Jayson, savings, what's that? All we owe is our mortgage and its very difficult to save anything. Everything has gone up but unfortunately not everyone makes a 6 figure income annually. These so-called experts always get it wrong, but I'm sure that their salaries remain the same. I'm sure of every CEO of every company keeps their outrageous salaries. I'm sure that the Banks are not willing to lower their quarterly profits which are outrageous. I'm sure that the Banks are not willing to lower any fees or even eliminate some of them to help the little canadian that without them, they wouldn't have those profits. Pretty soon, I'll have to get a second job to help out my husband in order to continue paying Hydro bills, and for the basics of life. Forget the renos that must be done, just maintenance keeps us going. Savings, what's that?

Bill in Ottawa
said

Tha bank is exactly right to increase rates. Does anyone else see a problem with the underying premise of basing an economy on pure consumption? Consumption economies only work when people are spending - ie saving less - ie stretched thin and unable to adapt when fluctuations hit the market (see American housing foreclosures). I would argue its time for a new model: the Economic Equilibrium Model. Consumption should be kept in check with interest rates high enough to discourage rabid borrowing and encourage leveraging savings and subsidized by re-use and recycling. Wealthy people don't get rich by writing a bunch of cheques. They are better off because they understand the importance of hedging against interest increases (and other risk factors).

Larry I Ontario
said

Mr. Carney is the worst thing to ever happen to Canada. He has been wrong on every prediction for our country and raising interest rates in the middle of a double dip recession is about as smart as introducing HST smack in the middle of this also. Keep sticking it to the common person and no one will buy anything! Why does our governments not get it?? Time to vote every government out of office and let someone with some common sense take over!!

Jim from Killarney Mb
said

Bank of Canada rises rate 1/4 %, but the banks will rise ther lending more, plus look what we please on credit cards , know one complains about those rates .

Nolan Moore
said

As a person whos' work is partially tied to the lending rate, i see this as a bad thing. Particularly as higher rates usually mean lower borrowing, less home purchasing, etc. It's a tough call, the Canadian economy should be able to handle it but the world economy is still sputtering.

Jay
said

Central Banks were created for one purpose; to print money, and control it's distribution. The increased rate affects the government (thus the taxpayer), as now all money printed will come with an increased debt load on it. So all the money that the government has borrowed from the "bankers" now costs more (as it's debt load is now .25% higher). Do a little research on Central Banks. You'll find that it's the same families that operate them all. It was also those families that caused most of the economic turmoil we have all endured for the last 100 years...

Jim in Ottawa
said

With the statistics showing that the average Canadian is spending around $1.46 of every $1 they earn, coupled with rising hydro rates, introduction of the HST, EI rates rising next year, and now interest rate hike, it is very important for the sake of the country that those who are carrying these obsene debt loads not only start exercising some restraint, but start cutting back on spending.

Quiet Rhythm
said

Thats it!! Im going to live in a cave!

Greg
said

Were heading into a depression. Hold on to your hats.

eddytoronto
said

Goverment of Canada misleading the taxpayers about the General Motors loan repayment. According to a report confirmed by the Inspector General, one category of TARP loan was repaid with another category of TARP money. According to the report, General Motors did not pay back their taxpayer loan out of production by selling new cars, they paid it back by obtaining another taxpayer loan. This is passed off as free market capitalism. In other words, real capitalism is now DOA. Dead on Arrival. As psychotic and insane as the finance minister who actually believed he has done something good for the people of Canada.The Euro bailout for troubled Eurozone countries hoping and praying that somehow this intervention will keep out-of-control markets from attacking the weaker members of the 16 countries that use the faltering Euro. It isn't going to succeed. The battle has already been lost. Mathematically the game is already over. Derivatives and debt have pushed the Eurozone and Euro to the edge of collapse. And this is being solved how? By adding even more debt?

mead
said

Whoever says the end of this recession is in sight - is lying. You ain't seen nothing yet.... This sucker is going to drag on another 5 years.

T-Rex in AB
said

My two bits (13 cents after taxes) worth. Put a cap on the profits that the banks are allowed to make, force the banks into profit sharing, force an interest rate differential limit between lending and interest paid out. Give the money back to the consumers so we can spend or save as we see fit.

jP
said

Thats a smart move-Keep rasiing them - but more peoplemin bankruptcy, stop people from spending and bury the country

/Eileen25
said

My business in B.C. took a terrible hit when the HST was introduced. Now the interest rates are going up. Looks like this will be the straw that breaks the camel's back.

PPT
said

No Jayson, You want ppl to spend money for the growth of the economy not saving. If they keep increasing the rates Canadian exports & manufactures suffer, ending up like Detroit or Windsor

Richard in New Brunswick
said

So many experts... so few correct!It's ALL ABOUT THE MONEY... that the banks make.It has NOTHING to do with a concern for the plight of the individual Canadian. Nothing.

Here we go again!
said

I don't agree with the hike. Here we go again with the GREED. Some say spenders are the biggest threat to our economy - I say it's the bankers. How can we be at 1% while our partner to the south is in dire straits? Makes no sense. Only meant to squeeze all they can out of the taxpayer.

Josh
said

It's better to slowly raise the rate to avoid what happened 10 years ago where rates were kept too low for too long. Which in part lead to the economic crisis we're still trying to get out of. And to be honest I don't even think it was necessary to even go that low with the rates to begin with. For the US maybe, but not for Canada.

Prof. Pye Chartt
said

This measure is really going to help. (Just what, exactly, I'm not sure.) Inflation seems to be under control, outside of the HST messing with prices, and the real estate market is continuing to lose some harmful air. Hmm. I'll leave it to the tinkering wizards.

KJ in Kingston Ontario
said

Interest rates should never have been allowed to fall below the real rate of inflation. This anomaly along with the easy money policy of the central banks has caused most of the current economic problems.

Terry
said

Rising Bank rates. With the public keeping their wallets in their pockets small business are suffering. These include retailers, trades people, and service industries. The government needs to assist these businesses to think outside the normal box of thier business. Helping them to develop new markets, new processes and ways to cut costs which includes cheeper money to expand, create employment and fend off the big box stores.

Jayson
said

What is wrong with saving Jordan? It's people who spend beyond their means who are the biggest threat to our economy.

steve
said

Just what business needs, increase our borrowing costs so we have, along with the HST, a real reason to inflate all our prices and remove even the lint from the bottom of the change pockets of Canada's over taxed and tapped out populous

Dean in Abby
said

How is it that I keep hearing that the economy isn't doing well, housing bubble, etc, and now interest rates are to go up again?! I hope we're not paying the guy in charge very much because this seems to be opposite of what should be done. How is that going to stimulate spending?

Scott_G
said

when rates go up, people take notice and get moving, make a purchase etc. So, if he raises rates, just a tiny bit, you might see more activity, not less. And if you don't get rates back to normal some time, everyone will inflate the prices of things because of extra money around. --That would bring on a lag of wages, and we would be the dog chasing its tail. ---He will raise rates. As long as there is any bit of inflation, and there are still good job numbers, there is no reason for him not to make a correction.

Jordan
said

With lower interest rates, we the people, are supposed to be spending. Well I think we're finally tapped out! Especially in the housing market.Time to raise the interest rates to benefit the savers in the crowd...

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