It is the Bank of Canada's (BOC) second rate hike this year following a first hike in July as it remains the only other major central bank in the world to tighten its monetary policy stance other than the U.S. Federal Reserve. Last month the Czech Republic's central bank also raised its rate.
The BOC has now raised its rate by 50 basis points this year and has fully unwound the two rate cuts in 2015 in response to the fall in crude oil prices.
"Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation," the BOC said, adding it would pay particular attention to the economy's potential, the labour market and the sensitivity of the economy to higher rates given elevated household debt.
The Canadian dollar, which has been rising against the U.S. dollar since January 2016, and especially since May in anticipation of BOC rate hikes, dipped slightly in response to today's guidance and was trading at 1.24 to the U.S. dollar, down from 1.23 yesterday.
But compared with the start of this year, the Canadian dollar, known as the loonie, is still up 8 percent against the greenback and the BOC noted the rise in the exchange rate reflected the strength of the economy.
"Recent economic data have been stronger than expected," the BOC said, supporting its view that economic growth is becoming more broad-based and self-sustaining, with robust consumer spending and solid growth in income and employment.
Canada's Gross Domestic Product expanded by 1.1 percent in the second quarter of this year from the first quarter for the highest growth rate since the third quarter of 2011. On a year-on-year basis GDP jumped 3.7 percent, up from 2.3 percent in the first quarter.
At the same time the housing sector is now cooling in some of the major cities in response to recent tax changes and the BOC said it still expects overall growth to moderate in the second half of the year.
Canada's inflation rate remains below the BOC's 2.0 percent target and wage and price pressures remain more subdued than in the past, with some excess capacity in the labour market.
Headline inflation in July rose to 1.2 percent from 1.0 percent in June.
The Bank of Canada issued the following statement:
"The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth. There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.
The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada’s economy.
While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Bank’s core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack. Nonetheless, there remains some excess capacity in Canada’s labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.
Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some of the considerable monetary policy stimulus in place is warranted. Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation. Particular focus will be given to the evolution of the economy’s potential, and to labour market conditions. Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates."
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