Bank of Canada Raises Rate to 3.75%

The Bank of Canada raised its key lending rate for the fifth time in a row Tuesday, as expected, and said “modest” rate hikes may be required in the future, Business Council of B.C. executive vice-president Jock Finlayson said Tuesday.

The central bank raised its target for the overnight rate to 3.75 per cent from 3.5 per cent, returning it to the same range the rate was in just after the Sept. 11, 2001 terrorist attacks in New York.

The bank toned down its language from the last statement in January. It noted that the dollar “has recently moved above the range that had been assumed in the [January] update,” and it said that modest rate hikes “may be required” in the months ahead as the economy operates at full capacity. In January, it said they “would be required.”

The change in tone makes the next decision on April 25 more dependent on growth and inflation data in the interim,” said Ted Carmichael, chief economist at J.P. Morgan Securities Canada, in a note. He still expects the bank to hike again in April before “pausing for a while.”

The dollar is now trading at 87.13 cents (U.S.) and rose above the 88-cent mark last week. In its January monetary policy report update, the bank had pegged the range at between 85 cents and 87 cents.

The sudden appreciation of the dollar, which is near a 14-year-high, could slow economic growth by making Canadian exporters' goods more expensive abroad and hurting their ability to compete with other countries.

“Overall, indications are that the Canadian economy is continuing to operate at its full production capacity,” the bank said.

“Some modest further increase in the policy interest rate may be required to keep aggregate supply and demand in balance and inflation on target over the medium term,” it added.

Economic growth in the fourth quarter, along with inflation, have been in line with the central bank's expectations.

Its views on the outlook for growth and inflation, including the assessment of risks, haven't changed since January, the bank said in explaining why it still may raise rates again.

The bank makes its next rate decision on April 25 and will provide details on economic developments and risks in the next monetary policy report two days after that.

On Sept. 17, 2001, the Bank of Canada made a decision outside of its fixed announcement dates, cutting interest rates to 3.5 per cent from 4 per cent.

(prepared by Tavia Grant/Globe&Mail)