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Bank of Canada Sees Gradual Interest Rate Hike; CAD Mixed

Bank of Canada Sees Gradual Interest Rate Hike; CAD Mixed

Trang Nguyen,

THE TAKEAWAY: CanadianEconomy has Grown Steadily but Still Being Constrained by External and Internal Headwinds> Gradual Increase in Interest Rates is Expected through 2013 > CAD Mixed

Though leaving its key rate at 1 percent for the thirteenth consecutive meeting as anticipated the day before, the Bank of Canada surprised the market with the more-hawkish-than-expected tone as it signaled its possibility to raise interest rate in future. Economists gave divergent opinions on the timing and degree of monetary policy tightening. Some said the Bank of Canada seems to be ready to increase, but it won’t be until 2013. Today’s monetary review gave some clues as to why any withdrawal of the present monetary policy stimulus will be weighed carefully against domestic and global economic developments.

Following are highlights from the Bank of Canada Monetary Policy report released today in Ottawa.

  • The profile for global economic growth has improved since January. Europe is anticipated to emerge slowly from recession in the second half of 2012 while U.S. economy is recovering more resiliently on improved labor markets, financial conditions and confidence. Besides, economic activity in emerging countries is expected to moderate to a still-robust pace.
  • Economic momentum in Canada is slightly firmer than the Bank had expected. Business and household confidence are improving faster than forecast in January. Business investment is projected to remain robust, reflecting solid balance sheets, very favorable credit conditions and continuing strong terms of trade and heightened competitiveness pressures. In contrast, the recovery in net exports is likely to remain weak in light of modest external demand, ongoing competitiveness challenges and persistent strength of the Canadian dollar.
  • Canadian economy was projected to grow by 2.4 percent in 2012 and 2013 before moderating to 2.2 percent in 2014. The degree of economic slack has been somewhat smaller than the Bank had anticipated in January. The economy is now expected to return to full capacity in the first half of 2013.
  • Due to reduced slack in the economy and higher gasoline prices and stronger momentum in household spending, inflation in Canada is expected to be somewhat firmer than anticipated in January. Total and core inflation are expected to be around 2 percent over the balance of the projection horizon.

Canada’s economy has grown steadily since emerging from the 2008-2009 recession but it is still being constrained by external and internal headwinds such as heavy household debt, strong currency and soft export markets. The Bank also raise its estimate for average exchange rate for the loonie to above parity $1.01 from $98 cents in its previous report.

USDCAD 1-minute Chart: April18, 2012

041812_Bank_of_Canada_Monetary_Policy_Report_body_Picture_1.png, Bank of Canada Sees Gradual Interest Rate Hike; CAD Mixed

Chart created using Strategy Trader – Prepared by Trang Nguyen

Canadian dollar immediately fell approximately 20 pips against the dollar from 0.9888 to 0.9908 following the Bank of Canada’s Monetary Report. The Canadian currency pulled back versus its major counterparts as the Bank did not indicate the interest rate rise in the near future. In theory, interest rate hike can strengthen the Canadian dollar since higher interest rate will attract more foreign investors looking for high-yield returns on their investments and lead to an increasing demand for the loonie. However, economists now widely expect the next rate increase in the first quarter 2013 at the soonest.

--- Written by Trang Nguyen, DailyFX Research Team for DailyFX.com

To contact Trang, email tnguyen@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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