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Interest rates on rise

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OTTAWA—The Bank of Canada yesterday hiked its benchmark interest rate for the first time in nearly seven years in what may be the beginning of the end of the era of cheap borrowing that has fuelled the hot housing market and record levels of debt.

The central bank raised its key interest rate target to 0.75 percent from 0.5 percent—the first increase since September, 2010—amid rising confidence the economy has turned the corner and expectations of stronger growth ahead.

“The economy can handle very well this move we have today,” governor Stephen Poloz told a news conference in Ottawa.

He cited the central bank's “bolstered confidence” in the country's economic outlook, including brighter prospects for exports and business investment, compared to the beginning of the year.

The Bank of Canada cut interest rates by a quarter of a percentage point twice in 2015 to help the economy deal with the plunge in oil prices.

But Poloz said the economy no longer needs as much stimulus.

The hike, while incremental, prompted the country's big banks to raise their prime rates, which are used as a benchmark for variable rate mortgages, home equity lines of credit, and other loans.

Even with the increase, interest rates remain low from a historical perspective—and Poloz said Canadians should be prepared that rates will rise further at some point in the future.

“People need to understand that in the full course of time, I don't doubt that interest rates will move higher, but there's no predetermined path in mind at this stage,” he noted.

Scotiabank chief economist Jean-Francois Perrault said he expects yesterday's announcement marks the start of a gradual cycle of rate hikes.

Perrault said he's watching carefully to see if exports and business investment deliver as the Bank of Canada is predicting.

“The key thing to the forecast is a pick-up in investment and a pick-up in export growth because the household side has been doing too much of the heavy lifting,” he argued.

“If that were to continue, I think that speaks very favourably for growth prospects going forward and kind of a continued gradual pace of increases from the bank.”

Senior deputy governor Carolyn Wilkins said the central bank was cautious in the spring because it has been disappointed before when economic data has failed to live up to expectations.

But she said the data since May, including positive momentum in jobs and exports, as well as a broadening of growth across industries and regions, has helped instil confidence.

Bank of Montreal chief economist Doug Porter said he expects the next rate hike will occur in October, but wouldn't rule out such a move at the central bank's next scheduled announcement on Sept. 6.

"And so the tide begins to turn,'' Porter wrote in a brief note to clients.

“The overall tone of the statement and the bank's updated forecast are on the upbeat side of expectations.”

In its outlook for the economy, the Bank of Canada estimated growth to be 2.8 percent this year, 2.0 percent next year, and 1.6 percent in 2019.

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