The Bank of Canada unexpectedly raised interest rates on Wednesday by 25 basis points, triggering a sharp appreciation in the Canadian dollar and taking it to more than two-year lows against the greenback. Then, it was the first increase in the key rate since 2010.
Furthermore, the central bank said it would pay "close attention" to how the economy responds to higher borrowing costs, given households have accumulated record levels of debt. CAD gains can not be unlimited if Oil does not to some extent support the bullish sentiment as the Bank of Canada is still very sensitive to the broader picture for Crude Oil.
According to the statement, recent data has been stronger than expected, supporting the bank's view that growth is becoming more broadly based and self-sustaining.
The Bank of Canada forged ahead with another interest rate hike in a nod to the country's surging economy, while signaling its appetite for further tightening may be curbed by a rising currency and sluggish price pressures.
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In a statement, the Bank of Canada noted that consumer spending remains robust, "underpinned by continued solid employment and income growth".
Canada's currency surged to its strongest level in two years, short-term bond yields hit a five-year high and the country's main stock index slipped on Wednesday after the Bank of Canada surprised many by raising interest rates. There has also been more widespread strength in business investment and in exports. The Canadian Dollar also surged to a 2 year high against its US Dollar counterpart following the announcement of the BoC's decision to raise rates, the exchange rate dropped almost 3 cents in a matter of seconds.
Investors anxious that the sharp appreciation of the Canadian dollar would hurt prospects for producers of commodities priced in US dollars.
Given the stronger-than-expected economic performance, Governing Council judges that today's removal of some of the considerable monetary policy stimulus in place is warranted.
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Toronto-Dominion Bank's CEO Bharat Masrani also said rising rates would be good for his bank, Canada's second-biggest lender, as long as they proceed at a moderate pace.
Market watchers who predicted Bank of Canada Governor Stephen Poloz would keep interest rates unchanged this week argued he had the luxury to wait until October, noting inflation remained tepid. However, significant geopolitical risks and uncertainties around global trade and fiscal policies remain, leading to a weaker USA dollar against many major currencies.
"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.
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