The Bank of Canada surprises with a rate hike

Stephen Poloz Bank of Canada

(Bank of Canada Governor Stephen PolozReuters/Chris Wattie)

The Bank of Canada unexpectedly hiked its key interest rate by 25 basis points to 1.00% on Wednesday, citing stronger than expected economic data.

The majority of economists surveyed by Bloomberg forecast that the central bank would hold at this meeting.

"Recent economic data have been stronger than expected, supporting the Bank's view that growth in Canada is becoming more broad-based and self-sustaining," the bank said in the accompanying statement.

The bank also said that although the global economy is seeing stronger than expected growth indicators there are "significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies."

Wednesday marks the bank's second consecutive rate hike. At its previous meeting in July, the BoC raised its key rate for the first time in seven years, also by 25 basis points.

Investors had been expecting the bank to hike one more time this year, said Craig Erlam, senior market analyst at OANDA, in emailed comments ahead of Wednesday's rate decision. However, most thought the rate hike would come later in the year, not at the September meeting.

Looking forward, the BoC suggested that there could be more rate hikes in the future.

"While we can’t rule out another rate hike before the end of this year, we should note that the economy is still overly dependent on the heavily indebted household sector to support economic growth," said David Madani, senior Canada economist at Capital Economics, in emailed comments. "That was possible when housing prices were rising rapidly and interest rates were at record lows. But both of those supports are clearly fading."

"With the housing market teetering even before rates began to rise, we expect the economy to lose momentum before the year is over, prompting the Bank to abort its rate hike cycle."

The Canadian dollar shot up after the announcement. It was stronger by 1.1% at 1.2238 at 10:05 a.m. ET after holding little changed ahead of the decision.

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