BoC Raises O/N Rate 25bp to 0.50%; Prime Follows

The Bank of Canada has announced:

that it is raising its target for the overnight rate by one-quarter of one percentage point to 1/2 per cent. The Bank Rate is correspondingly raised to 3/4 per cent and the deposit rate is kept at 1/4 per cent, thus re-establishing the normal operating band of 50 basis points for the overnight rate.

Activity in Canada is unfolding largely as expected. The economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth has resumed. Going forward, household spending is expected to decelerate to a pace more consistent with income growth. The anticipated pickup in business investment will be important for a more balanced recovery.

CPI inflation has been in line with the Bank’s April projections. The outlook for inflation reflects the combined influences of strong domestic demand, slowing wage growth, and overall excess supply.

In this context, the Bank has decided to raise the target for the overnight rate to 1/2 per cent and to re-establish the normal functioning of the overnight market.

This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

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 re-establishment of normal operating conditions is explained separately:

The Bank will conduct Special Purchase and Resale Agreement (SPRA) and Sale and Repurchase Agreement (SRA) operations as necessary to reinforce the target for the overnight rate (see Terms and Conditions). The targeted level of settlement balances will be gradually reduced to the typical level of $25 million according to the following schedule:
  • 2 June 2010 – targeted settlement balances will be lowered from $3 billion to $1 billion;
  • 9 June 2010 – targeted settlement balances will be further lowered from $1 billion to $200 million; and
  • 16 June 2010 – targeted settlement balances will be lowered from $200 million to $25 million.

The Overnight Standing Purchase and Resale Agreement (PRA) Facility, under which Primary Dealers have access to an overnight standing PRA facility at the Bank rate, will be made a permanent part of the standard operating framework

The banks have followed:

  • BMO +25bp to 2.50%
  • RY +25bp to 2.50%
  • BNS +25bp to 2.50%
  • NA +25bp to 2.50%
  • CM +25bp to 2.50%
  • TD +25bp to 2.50

2 Responses to “BoC Raises O/N Rate 25bp to 0.50%; Prime Follows”

  1. […] first day of the Dreaded Rise in Interest Rates didn’t interupt the recent rally in the Canadian preferred share market, with […]

  2. […] the Canadian preferred share market. “They” should “raise interest rates” more often! PerpetualDiscounts were up 31bp, while FixedResets gained 4bp as volume continued at slightly […]

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