Bank of Canada increases overnight rate target to 1 1/4 per cent

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The Bank of Canada raised interest rates on Wednesday, as expected, as job growth and firmer inflation outweighed the cloud of NAFTA uncertainty, but the head of the central bank admitted the decision was not a no-brainer.

A class-action lawsuit filed in a USA court alleges six Canadian banks and three others conspired to increase the profitability of their derivatives trading business by manipulating an interest rate benchmark for about seven years.

Uncertainty around US trade policy and recent tax reforms south of the border are expected to knock about 2.5 percent off business investment in Canada over the next two years, the Bank of Canada said on Wednesday. However, it cautions about the substantial improbability linked to the possible changes of policy by the USA, which is its major dealing partner.

"We share the Bank of Canada's view that higher rates will be needed over time". The Bank Rate is correspondingly 1.5 per cent and the deposit rate is 1 per cent.

The promise by Trump to have the policy amended together with his patriot vow which would cost export and Canadian investment.

In a release on the Bank of Canada website this morning, expected growth in the global economy is expected to average 3.5 per cent over the projection horizon.

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"Recent data have been strong, inflation is close to target and the economy is operating roughly at capacity", the bank said in the announcement. While the Bank isn't ready to assume that NAFTA will be completely cancelled, doubts on that front can impact business sentiment, and they've included a 0.5% hit to the level of GDP through the next two years to account for that effect.

The central bank says consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. Growth in advanced economies is projected to be stronger than in the Bank's October Monetary Policy Report (MPR). The consensus calls for three modest rate hikes in 2018.

"If we continue to see those NAFTA related uncertainties", Donald said, "and if we see some downsides to the economy from new mortgage rules that came in or from potentially the increase in minimum wages then we'll probably be a Bank of Canada that needs to go more slowly".

The central bank estimates the economy grew 3% previous year, and is expected to expand 2.2% in 2018. Prior to the Bank of Canada's move, their rates were all 3.2 per cent. TD Economics expected a gradual pace of tightening over the next two years of about 25 basis points every six months.

The claim alleges the banks suppressed the rate by making artificially lower interest rate submissions to Thomson Reuters, which calculates the CDOR daily.