Less than two months ago, the Bank of Canada raised interest rates for the first time in seven years. Traders priced in a 40% chance of the central bank raising interest rates again today, with higher odds for a move in October or December.
Policymakers in Ottawa had a surprise in store: they raised the bank’s benchmark policy rate by 25 basis points, to 1%. The Canadian dollar promptly jumped 1.5% against the US dollar, to its highest level since mid-2015.
Canada’s economy has been consistently exceeding expectations. GDP grew at an annualized rate of 4.5% in the second quarter, compared with 3% for the US. Meanwhile, housing markets in Canada’s biggest cities have been running hot. On top of taxes on overseas buyers and tighter restrictions on mortgages, higher interest rates may cool them down.
After two consecutive rate hikes, Canada’s target policy rate is closing in on the equivalent benchmark rate in the US, where the Federal Reserve has been leading the push towards “normalization” among big central banks, following many years of rock-bottom rates in the aftermath of the global financial crisis.
Even before today’s unexpected rate hike, the Canadian dollar was on a tear. Since the beginning of the year it has climbed more than 10% against the US dollar.