Canada increases interest rates to 0.5%

Bank of Canada The Bank said it remained cautious about the global economy

Canada has become the first member of the G7 group of industrialised nations to raise interest rates since the global financial crisis.

The Bank of Canada has increased its key lending rate by one quarter of a percentage point to 0.5%.

The increase comes after the Canadian economy has grown strongly since the start of the year.

Official figures showed that its economy grew at an annual rate of 6.1% in the first three months of the year.

Jorn Madslien

The Canadian interest rate hike seems like a sensible move, coming as it does after a three-month period when economic growth came in at 6.1%, its strongest rate since the boom in 1999.

Much of the growth was home-grown as consumers took advantage of near-zero interest rates to buy big-ticket items such as cars or kitchen goods, pushing borrowing levels to historical highs.

But growth was also export-led. Canada's goods-producing sector recorded growth of 11.2% during the quarter when compared to a year earlier.

Looking ahead, though, the growth could well slow as the world tightens its belt once again amidst renewed concerns about the global economy, while at home consumers will no doubt feel the squeeze of higher rates.

This followed an annual growth rate of 5% during the last quarter of 2009.

Canada has been shielded from the worst of the global financial crisis, because its banks were much less exposed.

As a result, no major Canadian lender has needed to be bailed out by Canada's government.

Canada also has much stricter mortgage sector rules than in the US, where sub-prime lending - offering mortgages to low income or high risk households - sparked the financial crisis.

Looking ahead, the Canadian central bank said global economic risks remained.

It said it was cautious about "the possibility of renewed weakness in Europe" and an "increasingly uneven" worldwide economic recovery.

The other members of the G7 are the US, UK, France, Germany, Italy and Japan.

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