Published: Thu, September 07, 2017
World Media | By June Phelps

Bank of Canada raise interest rates boosting Canadian Dollar

Bank of Canada raise interest rates boosting Canadian Dollar

The loonie soared this morning after the Bank of Canada announced an increase in its key lending rate, a move that caught some market watchers by surprise. A majority of private-sector economists surveyed by The Wall Street Journal expected the central bank to leave its policy rate unchanged and to wait until its October meeting to raise rates again.

The come-from-behind economic recovery in Canada may be partly chalked up to fiscal stimulus more easily achieved in Ottawa than in gridlocked Washington, as well as the willingness of banks to lend, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

All major global central banks slashed interest rates and several turned to alternative methods to stimulate their economies in the wake of the global financial crisis in 2007-2009. The bank further noted that, "consumer spending remains robust, underpinned by continued solid employment and income growth.There has also been more widespread strength in business investment and in exports".

Clearly policy makers at the central bank did not share this view, raising the overnight target rate to 1% and citing the stronger than expected economy in the process. The Canadian interest rate is now back to 1.00 percent with two rate hikes in 2017.

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Bank of Canada snapped traders out of their slumber on Wednesday with an unexpected decision to hike interest rates.

Canada's currency climbed as much as 1.8 per cent after the decision, reaching $C1.2146 against its USA counterpart, the highest intraday level since June 2015, and extending the gain this year to 10 per cent.

Unfortunately, the central bank did not release a monetary policy report which is consistent with their quarterly release at every other interest rate announcements.

The Canadian dollar, meanwhile, climbed more than 10 percent since May to about 81 cents US. The suggestion is the Canadian dollar gains aren't totally reflective of growth.

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"There remains some excess capacity in Canada's labor market, and wage and price pressures are still more subdued than historical relationship would suggest", according to the statement.

The rest of the statement has a hawkish tone and is optimistic on growth, while at the same time mentioning the geopolitical risks (and uncertainty about worldwide trade).

"The Bank has said that future increases will not be "predetermined", which aims perhaps to indicate to the markets that they will not increase the rate a quarter point at each meeting, " wrote CIBC in a note to its clients. Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.

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