BoC moves to head off inflation

The Bank of Canada has raised its key overnight rate by 25 basis points to 3.25%. The move was largely already priced in, which drove the Canadian dollar to nearly 87 cents US on Monday. The real question was whether the central bank would boost its rate by 50 basis points.

The trend-setting Bank Rate is now at 3.5%. Rate hikes are expected to continue over the near term, as the economy continues to expand, creating more jobs and possibly fuelling inflation.

“The bank continues to judge that the risks to the outlook are balanced over the short term, but are tilted to the downside through 2007 and beyond,” the BoC said in a statement announcing the increase. “In line with the outlook, some further reduction in monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters and keep inflation on target.”

“The Bank of Canada will be delivering a Christmas present that only economists would appreciate in the form of a quarter-point hike in short-term interest rates,” said Derek Holt, assistant chief economist, RBC. “This is necessary, in our view, to cool down emerging inflationary pressures.”

So far, inflation has proven manageable, as the bank cited a slow down in October’s inflation rate, which came in at 2.6% thanks to cheaper gasoline.

“Overall, the bank’s outlook for the economy and inflation through 2006 and 2007 is broadly unchanged from October,” the bank said.

The ink was barely dry on the announcement when the major banks started announcing they were increasing their prime lending rates accordingly, to 5%.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com