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Bank of Canada Boosts Key Interest Rate

Economy: Confidence in recovery leads to first credit-tightening move since downturn began.

April 17, 2002|From Bloomberg News and Times Staff Reports

OTTAWA — Citing a "robust recovery," the Bank of Canada on Tuesday raised its key short-term interest rate--the first time a major industrialized nation has tightened credit since the global economy faltered last year.

The central bank said it raised its target rate for overnight loans between commercial banks to 2.25% from a 40-year low of 2%.

That put the rate half a point above the U.S. Federal Reserve's main short-term rate, now 1.75%.

Canada's economy skirted a recession last year and grew at a 2% annualized rate in the fourth quarter. The rebound led to record job growth in March.

"There's an inflation threat," said Don Drummond, economist at Toronto-Dominion Bank. He said the central bank wants to ward off a jump in the pace of consumer price increases, though that possibility is "still well down the road."

The Bank of Canada said in a statement that "a robust recovery appears to be underway" in the nation of 32 million.

Canada's biggest banks followed the central bank by raising their prime lending rates to 4% from 3.75%.

Like other major central banks worldwide, the Bank of Canada slashed rates last year to guard against a severe economic downturn.

Given the surprising strength this year in the economy of the United States--Canada's largest trading partner--analysts said the Canadian economy has performed better than expected. That made a rate increase inevitable, they said.

Likewise, the U.S. Federal Reserve is expected to boost short-term rates this year, assuming the U.S. recovery continues.

But the Bank of Canada has taken the interest-rate lead among major industrialized nations. The other central banks in the Group of 8 nations--the Bank of England, the Bank of Japan and the European Central Bank--have held off on lifting borrowing costs, taking their cue from the Fed.

The Canadian dollar rose modestly in value against the U.S. dollar after the rate announcement.

The Canadian stock market, measured by the Toronto Stock Exchange-300 index, gained 80.26 points, or 1%, to 7,841.57.

The TSE-300 index is up 2% this year, compared with a 1.7% loss in the U.S. Standard & Poor's 500 index and a 6.9% decline in the U.S. Nasdaq composite.



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