Sep 2010 8

Bank of Canada Hikes the Rate

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Photo by Danielle Scott Photo by Danielle Scott

The Bank of Canada announced on Wednesday that it is adding another quarter of one percentage point to its overnight rate, once again after the previous increases in July and June. The rate doubled since 1 June 2010. Both the Bank Rate and the deposit rate were simultaneously up to 1 ¼ respectively ¾ percent.

Economic recovery in Canada proceeds, but in a more modest pace than expected. The GDP growth slowed down since the 5.8% jump in January to March period, reaching only 2% in the second quarter of 2010. Also still uncertain recovery of our southern neighbour, held back by high levels of unemployment, is hampering our growth potential. However, both corporate and personal spending are showing sustainable growth, enough to justify this rate increase. The hike is supposed to keep the inflation target of 2% realistic in the environment of excess monetary supply. Canadian dollar jumped against USD (rising 1.11 cents to 96.53 cents US) as an immediate result of a slightly surprising announcement, while bonds dived lower.

The Bank indicated this hike might be the last one in the upcoming six months. As the Bank officials noted, "Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the Outlook." The next announcement will take place on 19 October 2010. According to a Reuters calculation on yields on overnight index swaps, the markets saw about an 82 percent probability of the bank leaving rates unchanged at its next policy announcement

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