Bank of Canada raises interest rate

The Bank of Canada raised its benchmark interest rate for the first time in more than a year and said a “modest” tightening may still be needed to slow inflation. Policy makers pushed the target rate for overnight loans up by a quarter point to 4.5 percent, the highest in six years and 75 basis points less than the American Federal Reserve’s target.

Canadian bonds rallied and the country’s dollar fell as traders speculated that Governor David Dodge’s team won’t rush to lift borrowing costs again. Dodge was urged by exporters and unions to delay an increase because of concerns the currency would rise to parity with the U.S. dollar and cost jobs.

Canada’s benchmark two-year government bond rallied the most since February 27. The yield fell 8 basis points, or 0.08 percentage point, to 4.62 percent. The price on the 3 ¾ percent security maturing in June 2009 rose 14 cents to C$98.42. Central bankers are “still warning that rates may need to head higher,” said Warren Lovely, an economist with CIBC World Markets in Toronto, even while today’s statement is “not as hawkish as the bond market feared.”