By CountingPips.com
The Bank of Canada held its interest rate today at the all-time low of 0.25 percent as widely expected by economic forecasts but decided to remove its conditional guarantee that interest rates would remain in place through the end of the second quarter. This new turn of events in the BOC policy has boosted the Canadian dollar to surge against the U.S.
In response the financial crisis, the BOC had announced, in April 2009, its intention to hold the interest rate at the record low level through the second quarter of 2010, conditional on the inflation rate and in a bid to spur the economic recovery. Today’s abandonment of that policy signals a shift in the bank’s feeling that the economic recovery is on a better course than previously predicted and that interest rate hikes may soon be coming.
The Canadian “loonie” dollar advanced sharply in trading following the announcement to surge over 200 pips against the euro, Japanese yen and the British pound on the day while gaining by over 150 pips versus the U.S. dollar and reaching parity with the American currency. Against the Australian and New Zealand dollars, the loonie has advanced by close to 100 pips so far in trading today.
The BOC statement commented on the global economy saying that, “Global economic growth has been somewhat stronger than projected, with momentum in emerging-market economies increasing noticeably. Exceptional stimulus from monetary and fiscal policies continues to provide important support in many countries. The recovery in the major advanced economies is still expected to be relatively subdued, reflecting ongoing balance sheet adjustments and the gradual withdrawal of fiscal stimulus commencing later this year. Despite recent progress, considerable uncertainty remains about the durability of the global recovery.”
On the Canadian economy, the bank stated that the economy is “proceeding somewhat more rapidly than the Bank had projected in its January Monetary Policy Report” and that the bank now sees GDP growth of 3.7 percent in 2010. BOC projections out through 2012 now show GDP growth at 3.1 percent in 2011 and a GDP advance by 1.9 percent in 2012.
The BOC also warned again that the Canadian loonie’s rise could work against its economic growth as the stronger Canadian currency has made its exports more expensive to the U.S. which buys roughly 80 percent of Canada’s exports.
USD/CAD 1-Hour Forex Chart – The US dollar dropping sharply today versus the Canadian dollar in forex trading after the Bank of Canada’s rate announcement and decision to not guarantee the rate would be held at its record low level. Speculation that interest rates could be rising sooner than later has boosted the already-strong loonie to an even footing with the US currency and to a higher level against its other major currency rivals.