Canada raises benchmark interest rate, but it doesn’t look like a trend

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The Bank of Canada on Tuesday went where other major Western central banks still fear to tread: It raised its benchmark short-term interest rate for the first time since the global financial crisis exploded in 2008.

The bank lifted its key rate to 0.50% from 0.25%. The rate had been at a quarter point since March 2009.
In a statement, Bank of Canada policymakers appeared to justify the increase by saying that economic activity in Canada was “unfolding largely as expected. The economy grew by a robust 6.1% in the first quarter, led by housing and consumer spending. Employment growth has resumed.”

But the central bank also signaled that it was in no hurry to boost rates further, citing in part Europe’s government-debt crisis as well as expectations that Canadian household spending would decelerate.

“Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” the bank said.

With Europe’s financial system again under serious strain, the European Central Bank and the Federal Reserve are expected to stay on hold indefinitely with their benchmark short-term rates. The ECB’s rate is 1%. The Fed is holding its rate in a range of zero to 0.25%.

Canada fell into recession in 2008 with much of the rest of the planet, but the country’s housing and banking sectors did not suffer the kind of severe damage seen in the U.S. What’s more, Canada’s natural-resources-rich economy benefited as commodity prices rebounded in 2009.

Canada’s main stock index fell 1.6% on Tuesday, dragged down by another heavy sell-off in energy issues. But the Canadian market has held up far better than the U.S. market since the spring slump in stocks began. The Canadian market index is down 5.8% from its 2010 high reached April 26, compared with the 12% drop in the U.S. Standard & Poor’s 500 index from its peak April 23.

-- Tom Petruno