Canadian banks expect to benefit from Bank of Canada rate hike

A new subdivision rises in Kleinburg Ont. this year. A rate rise this week would likely make floating-rate mortgages rise almost immediately though stress test rules may blunt the effect on the wider market

The Bank of Canada increased interest rates by 0.25% to 1.00% following the latest policy meeting, the second successive rate hike.

The decision "implies that absent a significant shock, Wednesday's rate increase will be part of a larger and longer march towards interest-rate normalization", said Brian DePratto, TD Bank economist. "Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates".

Only six of 26 economists surveyed by Bloomberg News expected the central bank to hike its benchmark rate.

Royal Bank of Canada's Chief Executive Dave McKay said he expected the decision to raise interest rates to add more than C$300 million ($245 million) to revenues at the country's biggest bank over 5 years.

Recent better-than-expected data supports the view that growth is more "broadly-based and self-sustaining", the bank said, citing more "widespread strength" in business investment and exports, and "stronger-than-expected indicators of growth" globally.

Coming into Wednesday, only a select group of economists and analysts thought the Bank of Canada would hike rates.

The local stock market turned negative as investors retreated from rate-sensitive sectors including telecoms and utilities, which typically issue debt to pay for projects and pay out dividends that become less attractive when government bond yields rise.

In July, the Bank of Canada also increased the overnight rate by 25 basis points, its first hike in seven years.

Going forward, the central bank said it expects a moderation in the pace of economic growth in the second half of 2017, but already gross domestic product (GDP) is higher than it had forecast.

The Canadian dollar surged as much as 2.2 percent to post its strongest since June 2015 at C$1.2140.

"The future decisions in monetary policy are not predetermined and will be guided by new economic data and developments in financial markets", stressed on Wednesday the central bank.

Unfortunately, the central bank did not release a monetary policy report which is consistent with their quarterly release at every other interest rate announcements. However, significant geopolitical risks and uncertainties around global trade and fiscal policies remain, leading to a weaker U.S. dollar against many major currencies. It noted, however, that upward pressure on wages and prices remain more subdued than historical trends would suggest, which has also been seen in other advanced economies. This has taken a toll on the U.S. dollar against the Canadian Dollar.

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