The Bank of Canada has raised its target for the overnight rate by 25 basis points to 2.75%. The operating band for the overnight rate is correspondingly increased, and the Bank Rate is now 3%.

The market was expecting at least a 25 bps hike, but there is considerable uncertainty among economists about the next step. Just a few weeks ago, economists were speculating that the Bank could accelerate the rate by 50 bps. Then last week, there were suggestions that the rate hikes would be curtailed to avoid diverging too widely from the
U.S.

The Bank stated in its policy statement, issued today with the rate announcement, that “the economic recovery in Canada has remained stronger than expected and has broadened across sectors. This momentum has been reflected in continued strong growth in employment and spending by households, as well as in some pickup of investment in machinery and equipment. As a result, the economy has been moving towards full production capacity more quickly than anticipated. Core inflation, which was 2.2% in May, has remained a little higher than projected.”

But the central bank is also cautious. “On the positive side, with considerable monetary stimulus in the economy, growth in Canada could very well continue to exceed expectations. On the negative side, the main risk is the marked uncertainty associated with recent global corporate and financial market developments and their potential effects on confidence and world economic growth.”

As a result of this cautionary stance, the bank says it “will remain focused on taking the necessary actions to achieve the inflation target of 2% over the medium term.”

http://www.bankofcanada.ca/fixed-dates/rate_160702.htm