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(Sean Kilpatrick/Sean Kilpatrick/The Canadian Press)
(Sean Kilpatrick/Sean Kilpatrick/The Canadian Press)

Economy Lab

Central bank to Canadians: Brace for rate hikes Add to ...

To those betting on no interest-rate hikes this year, Bank of Canada Governor Mark Carney has a message: brace for disappointment.

The central bank left its overnight lending rate at 1 per cent Tuesday, a level it's stayed at since September. For the first time, it added that "some" of the considerable monetary policy stimulus now in place will be "eventually withdrawn."

That's central-bankese for "get ready for higher borrowing costs." While it didn't signal any imminent hike for its next meeting in July, Tuesday's statement raises the odds of a September increase.

Several think tanks and institutions, such as the OECD and the C.D. Howe Institute, have urged the bank to boost its key lending rate, even as investors have been increasingly placing wagers on a prolonged pause.

The bank reasons that excess capacity in the economy will be sopped up by the middle of next year, necessitating the need for higher rates. Indeed, the country's unemployment rate has been whittled down to 7.6 per cent from 7.8 per cent at the start of the year. Economic growth perked up in the first quarter and the output gap has narrowed.

Inflation, meantime, is running at the hottest level in more than two years. Some of that, such as gasoline and tax hikes, may be temporary -- but higher food costs are expected to stick. And as economic activity picks up, so too will price pressures. The central bank's own business outlook survey this spring showed more businesses are bracing for hotter inflation.

The central bank cautions that higher consumer borrowing and spending could send inflation above its projections. On the dampening side, a stubbornly strong Canadian dollar is throwing up headwinds for exporters, and making imports cheaper.

It's a tough balancing act, as rate hikes will surely add more fire to the loonie and place additional pressures on exporters, just as many consumers are crippled with debt and vulnerable to higher borrowing costs.

But the picture painted today clearly points to rate hikes after roughly a full year on hold -- a move that carries significant ripple effects for the Canadian dollar, consumers, exporters and real-estate agents. Batten the hatches.

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