Canadians were hit with another round of interest rate increases today, following a weekend move by the central bank to defend the Canadian dollar.
The Bank of Canada raised its bank rate one-half percentage point to 12 1/4 percent following increases Friday in U.S. bank prime rates to a record 12 3/4 percent. It was the ninth time since January 1978 that the bank has raised the rates.
Today all major banks in the country raised their prime lending rates to a record 13 percent, up half a point. This is the rate charged by banks on loans to their largest and most-creditworthy commercial customers.
The bank rate, roughly the equivalent of the U.S. discount rate, is largely an indicator of government policy. It applies to infrequent loans by the central bank to the chartered banking system. A move in the bank rate indicates the direction Ottawa wants domestic rates to move.
The banks also increased mortgage loans to 12 3/4 percent, the highest since the 1860s, when a 16 percent rate was reached during the unsettled U.S. Civil War period.
Canadian banks have increased rates paid on nonchecking savings deposits to 10 1/4 percent from 10 percent retroactive to Sept. 1. They will pay 11 percent on these deposits beginning Oct. 1.
Canada has used high domestic interest rates as a major weapon to defend its currency in foreign exchange markets. The Canadian dollar rose to about 86 cents in United States funds today, from about 85.75 cents on Friday prior to the central bank announcement. Although the rate move was widely anticipated, the dollar reacted strongly.
Government officials have said repeatedly that interest rates in Canada must remain higher than those in the United States to enable the nation to finance a current account deficit estimated at $7 billion this year.
Finance Minister John Crosbie said last week that "no politician wants high interest rates, but the dollar cannot be permitted to fall very far."
Robert Baguley, an economist with the Royal Bank of Canada, the nation's largest chartered bank, said interest rates generally are rising as nations attempt to avoid an inflationary binge following the latest oil price increases.
"I'm not very happy about the situation, but I don't think the Bank of Canada had any alternative," said John Bulman, president of the Canadian Manufacturers Association.