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Canada’s Key Lending Rate Headed Higher

The Bank of Canada has lifted its key lending rate by 1/4 percentage point, to 0.75%.

The Bank had this to say in its written statement:

  • “The global economic recovery is proceeding but is not yet self-sustaining.”
  • “Housing activity is declining markedly from high levels, consistent with the Bank’s view…”
  • “The Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April.”
  • “Both total CPI and core inflation are expected to remain near 2 per cent throughout [2011].”

Bank-of-Canada-Overnight-Target-RateThe above chart (Click to enlarge) shows just how low Canada’s overnight rate is when compared to the last 10 years. Accordingly, the BoC says today’s new 0.75% rate “leaves considerable monetary stimulus in place.”

The mortgage industry now awaits confirmation from the Big 5 banks that prime rate will follow 25 basis points higher. The banks typically announce prime rate increases the same day as BoC rate hikes. The last time around (on June 1), TD Bank was the first to act, raising its prime rate at 1:32pm ET.

Bond yields, which affect fixed mortgage rates, were down across the curve following today’s BoC statement.

As of this writing, the 5-year yield has sunk to 2.31%, just a few basis points above its one-year low of 2.29%. Given that many were awaiting today’s announcement for an indicator of rate direction, we may now see 5-year fixed rates drift slightly lower in the near term.

The next Bank of Canada interest rate meeting is September 8.