Canadian dollar jumps as Bank of Canada lifts benchmark rate 25bps

by Antonio Miles September 7, 2017, 1:50
Canadian dollar jumps as Bank of Canada lifts benchmark rate 25bps

Once branded a bank with an agenda to weaken the currency to support exports, the Bank of Canada's rate increase on Wednesday pushed the loonie up more than a full cent against the greenback. Then, it was the first increase in the key rate since 2010.

The majority of economists surveyed by Bloomberg forecast that the central bank would hold at this meeting.

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.

The Bank of Canada forged ahead with another interest rate hike in a nod to the country's surging economy, while signalling its appetite for further tightening may be curbed by a rising Canadian dollar and sluggish inflation.

"Consumer spending remains robust, underpinned by solid employment and income growth".

Speculation that the central bank was going to begin moving the key interest rate up intensified earlier this summer, when Bank of Canada Governor Stephen Poloz said these cuts had "done their job".

Governor Stephen Poloz is trying to strike a balance between bringing interest rates back to more normal levels amid the strongest growth spurt in more than a decade, without harming an economy that is only now beginning to fully recover from an nearly decade-long downturn.

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"Recent economic data have been stronger than expected, supporting the Bank's view that growth in Canada is becoming more broadly-based and self sustaining", reads a statement from the central bank. "That was possible when housing prices were rising rapidly and interest rates were at record lows".

On Bay Street, the Toronto Stock Exchange's S&P/TSX composite index slipped 5.82 points to 15,084.33, after 90 minutes of trading, but it had been positive before the bank's 10 a.m. ET rate announcement.

Looking ahead, the bank insisted future rate decisions will not be "predetermined" and will be guided by upcoming economic data releases and financial market developments.

Even with the recent economic improvements, the bank still underlined concerns around geopolitical risks and uncertainties related to worldwide trade and fiscal policies.

Investors anxious that the sharp appreciation of the Canadian dollar would hurt prospects for producers of commodities priced in USA dollars.

It noted that inflation remained below its 2.0 percent target, but said there is still some excess capacity in the labor market, and wage and price pressures "are still more subdued than historical relationships would suggest". Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.

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