- Inflation Target: First and foremost, the Bank of Canada looks at its inflation target of 1-3%. Raising rates will slow inflation and lowering them will increase it (because people will buy more if rates are lower which will raise prices). Inflation has nearly hit the Bank’s target of 2%. This was likely the ultimate deciding factor for today’s rate hike.
- The housing bubble: Carney surely wasn’t ignoring the massive price increases in the housing market due primarily to low interest rates. If rates remained low, Canadians and international investors would keep buying homes and pushing up prices.
- General growth of the Canadian economy: Just yesterday, there were better-than-expected GDP growth numbers released which also supports Carney’s decision to raise rates.
- International growth: Canada’s doing really well, but other countries (namely the US) hasn’t managed to pull itself out of the hole quite yet. Since we’re so dependent on international markets, Carney has to keep a close eye on whether higher rates will harm Canadian competitiveness.
- The introduction of the HST: while this factor likely won’t be particularly important until further rate hikes are considered, it definitely had some impact on Carney’s decision to leave his game plan for the next few months open to interpretation.
In the end, there is absolutely no upside in the [Bank of Canada] committing to a path of rate increases going forward – even though a series of 25 [basis point] increases over the remainder of the year still seems the most appropriate outcome. The Financial Post