Bank of Canada increases overnight rate target to 1 1/4 per cent


The Bank of Canada raised its benchmark interest rate by 25 basis points to 1.25 percent Wednesday, pointing to sustained growth in the G7 economy and inflation that is closer to the country's target.

A class-action lawsuit filed in a US court alleges six Canadian banks and three others conspired to increase the profitability of their derivatives trading business by manipulating an interest rate benchmark for about seven years.

Royal Bank and TD Canada Trust have both boosted their prime lending rates to 3.45%. However, it cautions about the substantial improbability linked to the possible changes of policy by the United States, which is its major dealing partner.

But if their lender hikes their rate three times to keep pace with the Bank of Canada, that monthly payment rises to $1,537.67 - an extra $100 a month. The central bank sets rate policy with the aim of reaching and maintaining 2% inflation. On the other hand, the bank predicted that Canada will see a small benefit from the recent USA tax changes thanks to increased demand.

The promise by Trump to have the policy amended together with his patriot vow which would cost export and Canadian investment.

The bank now expects Canada's economy to expand by 2.2 per cent this year and 1.6 per cent in 2019.

The central bank said it expects inflation to remain close to its 2% target through 2019. The report also said new, or "greenfield", foreign direct investment into Canada has fallen since mid-2016 - a possible impact of the trade uncertainty.

In the coming months, according to the BoC, "consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines".

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Rate hikes from the central bank can add up fast for Canadians with variable rate mortgages.

The Bank of Canada said the unknowns of the NAFTA's renegotiation are continuing to weigh on its forecast and have created a drag on investment and exports.

The bank slightly increased its predictions for 2018, up to 2.2 per cent from 2.1 per cent.

The claim alleges the banks suppressed the rate by making artificially lower interest rate submissions to Thomson Reuters, which calculates the CDOR daily. Prior to the Bank of Canada's move, their rates were all 3.2 per cent.

David Rosenberg, chief economist Gluskin SheffThose who had been forecasting three more moves this year did not receive much reassurance in what was a fairly dovish press statement.

The central bank estimates the economy grew 3% a year ago, and is expected to expand 2.2% in 2018.

The gap between the two-year yield and its USA counterpart widened by 1.7 basis points to a spread of -26.2 basis points, its widest since December 18.