In a highly-expected move, the Bank of Canada has raised its benchmark rate by one-quarter of a percentage point to 0.75 per cent, while issuing a gloomier economic forecast.
It was the second straight month the central bank hiked rates as the global economy begins its slow recovery.
However, Bank of Canada governor Mark Carney scaled back expectations for Canada's GDP for the year, from 3.7 per cent growth to 3.5 per cent.
The growth rate for 2011 dipped from 3.1 to 2.9 per cent, according to the Bank of Canada's projections. It said the economy won't be all the way up to speed until the end of that year, instead of the spring as previously thought.
"This revision reflects a slightly weaker profile for global economic growth and more modest consumption in Canada," the bank said in a statement.
Derek Burleton, an economist with TD Bank Financial Group, calls the move "appropriate."
He says weaker growth in the U.S., a slowing economy in China, and Europe's debt crisis had to be taken into consideration. He says the increase leaves the Bank of Canada with some wiggle room in a downturn, and that if the economy runs into trouble again, the bank can easily "stand pat."
"If you go back in history, (0.75 per cent) is still low for an interest rate and that's one of the challenges the Bank of Canada has: they've got to make their decisions today based on a very uncertain future," Burleton told Â鶹´«Ã½ Channel in Toronto.
Jump to likely affect variable mortgages
Meanwhile, housing activity has declined "markedly." And while employment growth has resumed, "business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession," the bank added.
The big commercial banks usually hike their prime rates in response to the Bank of Canada's moves, which can have an impact on variable mortgages.
BNN's Michael Kane says the central bank sees the global recovery as "proceeding but is not yet self-sustaining."
"Basically, they are saying because of uncertain economic times around the world that households are scaling back on spending, corporations are scaling back," he told Â鶹´«Ã½ Channel.
The next interest rate announcement is scheduled for Sept. 8. Some economists predict we will be at 1.25 per cent by the end of the year.
Burleton believes by September, Canadians could see another quarter-point increase, and that we could be sitting at a 1.0 per cent benchmark rate for a few months. He says the key word is "gradual" when it comes to increasing rates.
"We are looking at heavily-indebted consumers, on average, after very low rates spurred a lot of borrowing. And that gradual adjustment, while it may still sound like a lot -- if they move by quarter-point installments it will give consumers a chance to digest some of these rate increases going forward."
