Bank of Canada Raises Canadian Interest Rates .25% on September 8, 2010

In it’s third consecutive move this year, the Bank of Canada again raised its benchmark interest rate 25 basis points today bringing Canada’s Central Bank overnight lending rate to 1.0%.

Mark Carney raised the trend setting rate ¼ point from 0.75% to an even 1.0%. This follows similar ¼ point moves at the last two sessions when the Bank raised rates to .50% on June 1, 2010 and to .75% on July 20, 2010.

In its accompanying remarks, the Bank of Canada gave mixed signals about global economic recovery calling it “uneven” while projecting that the pace of economic recovery in Canada was “slightly softer in the second quarter than the Bank had expected.”

However going forward the Bank said, “Consumption growth is expected to remain solid and business investment to rise strongly” in Canada.

In its September 8, 2010 press release the Bank of Canada stated:

OTTAWA –The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

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

Economic activity in Canada was slightly softer in the second quarter than the Bank had expected, although consumption and investment have evolved largely as anticipated. Going forward, consumption growth is expected to remain solid and business investment to rise strongly. Both are being supported by accommodative credit conditions, which have eased in recent weeks mainly owing to sharp declines in global bond yields.

The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity. Inflation in Canada has been broadly in line with the Bank’s expectations and its dynamics are essentially unchanged.

Against this backdrop, the Bank decided to increase its target for the overnight rate to 1 per cent. As a result of monetary policy measures taken since April, financial conditions in Canada have tightened modestly but remain exceptionally stimulative. This is consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada.

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

The continued increases in rates over the past few months indicates that the Bank of Canada is confident that Canada’s economy will continue to rebound and no longer requires interest rates to be virtually zero to stimulate recovery.

There is a growing consensus with economists that the Bank will now pause at their next meeting on October 19, 2010 allowing Carney time to assess the durability of Canada’s economic rebound.

But some in the market are already looking at the next date with great uncertainty suggesting it was now more likely that rates would rise a fourth time at the next meeting in October.

“The overall impression I’m left with is they’re a little bit hawkish or bent on further rate hikes than I had been expecting,” said Doug Porter, Bank of Montreal’s BMO Capital Markets deputy chief economist. “The fact is that they’re just not fazed by the slowdown we’ve seen in the U.S. or Canada.”

Porter said he may reconsider his call that the central bank will pause on rate increases for the rest of the year.