A Third Rate Hike in Canada

September 8, 2010

After earlier increases on June 1 and July 20, the Bank of Canada hiked its target overnight rate by 25 basis points for a third time today.  Roughly three of every five analysts foresaw that result versus others who anticipated no change.

The decision was taken in spite of a downward forecast for projected Canadian economic growth due to “a weaker profile for U.S. activity.”  In some respects, today’s statement reads more hawkishly than the one released in July.  Financial conditions are now called “exceptionally” stimulative;  July’s communique called monetary stimulus “considerable,” a more common and less superlative adjective than exceptional.  Also, whereas the July statement spoke of business investment being “held back by global uncertainties” and “yet to recover from its sharp contraction,” today’s remarks about investment are that it is evolving as anticipated and expected to “rise strongly.” 

Officials had nothing new to say about inflation.  They are comfortable with trends and prospects.  The trend is as they anticipated, and “dynamics are essentially unchanged,” which is similar to the expression from July that “underlying dynamics for inflation are little changed.” 

Canadian officials are not closing the dollar on more rate increases beyond these three ones, but the verbal guidance regarding future policy was tweaked to further tightening moves needing to be considered “carefully in light of the unusual uncertainty surrounding the outlook” from June’s promise to weigh such a decision “carefully against domestic and global economic developments.”  It’s not apparent whether the tweaked language makes a rate increase at the next meeting on October 19 more or less probable.  The next Monetary Policy Report gets released a day later on October 20.

None of the statements explaining the three rate hikes taken thus far have mentioned the Canadian dollar.  Persistent exchange rate strength had been cited as a downside risk factor for Canadian growth in four of the previous five scheduled interest policy rate statements. With Fed policy currently more biased toward easing than tightening in the short term, today’s action by the central bank of Canada creates some potential for Canadian dollar appreciation.  The CAD has swayed to and fro between 1.0678 perer USD and 1.0107 per USD since the euro bottomed in early June.  Despite the volatility, the Canadian currency has found parity a very tough level to assault, and it is presently four cents below that barrier.

The latest on-year changes are +3.4% for Canadian GDP growth and 1.8% for the CPI.  The current account deficit last quarter equaled 2.7% of GDP, similar to its 2.8% ratio in 2009 as a whole.  In data released today, building permits were 3.3% lower in July, a somewhat smaller decline than expected.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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