Written By: Alessandra Yuan – Forex Focus
The central bank takes analysts by surprise with a 0.25 percent hike in key interest rates.
The Bank of Canada (BOC) in its monetary-policy meeting in September increased the key interest, or overnight, rate by 25 basis points to 1.00 percent, surprising a large number of market experts who were expecting a rate hike later in the year. The bank and deposit rates were also raised by 25 basis points and are currently placed at 1.25 and 0.75 percent respectively.
The September rate increase follows a quarter-percent hike in July this year and erases the earlier cuts carried out by the central bank in 2015 in response to the global oil-price shock.
According to the statement accessible on the central bank’s website, the BOC based its monetary-policy decision on the following factors:
Economic growth in Canada is broad-based, expanding and self-sustaining, according to recent economic data.
Robust growth in employment and income have led to a rise in consumer spending.
Business investment continues to expand.
Recent changes in the country’s tax structure have resulted in the housing sector moderating in some areas.
Inflation, which is currently below 2 percent, is broadly evolving.
The labour market in the country is showing signs of excess capacity.
Geopolitical risks remain high.
Significant uncertainties in international trade and fiscal policies.
Appreciation in the Canadian dollar reflects the strength of the country’s economy.
The Bank of Canada’s monetary-policy meeting was preceded by the second-quarter 2017 gross domestic product (GDP) numbers. Released by Statistics Canada, the GDP figures showed that the Canadian economy expanded at 4.5 percent during the year, the highest since 2011 and beating analysts’ expectations of 3.7 percent growth. For the quarter, the economy expanded at 1.1 percent, making it the strongest quarter-over-quarter performance in nearly six years, as household spending on goods improved, and growth in exports advanced.
With the US economy expanding at 2.2 percent annually in the second quarter and the eurozone economy registering a growth of 2.3 percent during a similar period, the pace at which Canada’s economy is expanding over the last few quarters catapults the country into one of the best-performing economies globally.
Since the last monetary policy meeting in July, policymakers from the central bank have more or less been quiet with reference to the Canadian economy, not giving even the slightest hint of what was to come following the monetary-policy meeting in September, upsetting some analysts who expected the bank to hold off at least until its next meeting in October. However, the bank defended its move and recommended market experts go back to the July policy statement that clearly indicated that all future interest-rate decisions would be based on the outcome of the country’s economic data.
The surprise monetary-policy move by the central bank led to fresh long trades in the Canadian dollar versus most of the majors. The greenback extended its losses with the pair hitting intra-day lows of 1.2130 before settling close to 1.2200, down by 1.25 percent for the session. The loonie (Canadian dollar) also extended its gains versus the euro with the pair ending the session at 1.4770, lower by 1.15 percent for the day.
Canada’s currency is currently trading close to 30-month highs against its US counterpart and near nine-month highs versus the single European currency.
Canadian stock markets reacted negatively to the sudden interest-rate decision, although the fall in the broader indices was not to the extent that one would have expected. Canada’s stock indices led by the primary S&P/TSX Composite Index slipped about 0.2 percent to extend its decline for the second straight session before settling near the session lows at 15059.83, as rate-sensitive sectors witnessed a fall offsetting the gains made by the energy sector. The index, which hit all-time highs of 15943 in February this year, is down about 5.5 percent from the peak.
The Bank of Canada next meets on October 25, and after drawing flak from the trading community, the central bankers are likely to more frequently issue statements and comments on the Canadian economy going into the next monetary-policy meeting to give meaningful insight and personal view on the broader economy’s assessment.
Based on the currency swap data compiled by Bloomberg, market analysts remain upbeat on the likelihood of the central bank hiking the rate again in the near future, possibly when it meets in October.