Bank of Canada hikes key interest rate by 25 basis points

The Bank of Canada hiked its key interest rate on Wednesday. Markets had put the odds of a rate hike at around 50/50. The central bank raised its key overnight lending rate by 25 basis points to 1 percent. The BoC’s statement that accompanied the decision had a decidedly hawkish tone, noted TD Economics in a research report.

Canada’s recent economic data have been stronger than the central bank’s expectations, while growth is seen as becoming “self-sustaining”. Except housing, strength in all major expenditure categories has left the level of output above the Bank’s previous expectations. Global growth is likely to become more synchronized, although uncertainties persist, stated TD Economics.

The BoC’s statement acknowledged that excess capacity continues to be present in labor markets, and that wage and price pressures are weaker than historical relationships would suggest. The Bank of Canada has decided that the removal of some of the “considerable” monetary stimulus was necessary; however, it added that future rate moves are not prearranged, and will depend on how the incoming data and financial market developments are expected to impact inflation’s path. Furthermore, the Bank of Canada also acknowledged the level of the Canadian dollar, and the sensitivity of the economy to hiking rates in the context of increased indebtedness.

Lately, the Canadian economy has been growing strongly, with the emergency interest rates level no longer required. The statement’s inclusion of the recent appreciation of the loonie was slightly unusually, suggesting that currency moves might be closely watched as part of the data dependency expressed again, said TD Economics.

According to TD Economics, today’s rate hike would be part of a larger and longer walk towards normalization of interest rate.

At 15:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was highly bullish at 142.07, while the FxWirePro's Hourly Strength Index of US Dollar was highly bearish at -159.963. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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