Interest rate hike shows central bank’s confidence in economy

July 11 — The Bank of Canada has raised its benchmark interest rate to 1.5 percent, marking the fourth time it has raised rates since last summer.

The increase from 1.25 percent is the base rate retail banks pay for short-term loans, but consumer rates for mortgages, lines of credit and other loans usually follow.

By hiking the rate, Bank of Canada governor Stephen Poloz is signalling confidence in the Canadian economy to deal with mounting trade concerns.

Strong growth in the United States, strong exports and business investments are offsetting U.S. President Donald Trump’s trade policies.

“Gross income is still projected to be up in 2018. Despite all the trade tensions and lower prices, 2018 will still be a decent year,” said J.P. Gervais, chief agricultural economist at Farm Credit Canada.

The real question, he said, is what will happen in 2019. The impact of corn and soybean price declines won’t affect much of the 2017 crop being marketing in 2018, and he said many farmers will hopefully have hedged about 25 percent of 2018 crop. There may be a more difficult picture for the next six months on the livestock side with supply from the United States coming north. These factors send signals that prices will be lower in the second half of the year.

“But I think overall, I think it’s a very good projection.”

He added that a key point farmers might take away from today’s interest rate decision is to revisit their business plans. They should make sure their marketing strategies still make sense and look at risk management measures and ways to hedge against higher rates.

He added financial markets rate the likelihood of another interest rate hike this year at about 60 per cent.

The immediate effect of today’s Bank of Canada announcement was muted because any investors had already factored in the rate hike.

The Canadian dollar rose slightly immediately following the announcement, but then fell back. The CAD/USD rate was C$1.3124 at 11 a.m. ET, an hour after the announcement.

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