BoC Sends CAD Soaring With Shock Rate Hike

EDITORIAL: Debt levels a concern

Speculation that the central bank was going to begin moving the key interest rate up intensified earlier this summer, when Bank of Canada Governor Stephen Poloz said these cuts had "done their job".

"The message being sent they are ready to hike rates, irregardless of developments in the US", said Jimmy Jean, economist at Desjardins Capital Markets. Only five of 26 economists surveyed by Bloomberg News expected the central bank to hike its benchmark rate.

In response, the Canadian dollar suddenly moved to a new two-year high against the USA dollar, trading at 82.38 US cents moments after the release of the statement from 80.58 USA cents right before the announcement.

Adding to the market reaction was the fact the bank didn't repeat language from previous statements about the current degree of stimulus being "appropriate", which suggests it will stay on its tightening path.

The Bank of Canada has two more interest-rate announcements scheduled before the year's end. He changed his forecast last week to correctly predict therate increase.

Nevertheless, BoC said that while removing some of the "considerable" monetary stimulus that was in place was "warranted", further policy decisions were not "predetermined".




"The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices", said the Bank, but it noted that "significant geopolitical risks and uncertainties around worldwide trade and fiscal policies remain, leading to a weaker USA dollar against many major currencies". 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.

It is the only major central bank besides the U.S. Federal Reserve that has been raising rates. As well, consumer spending - boosted by strong employment and income growth - has been "robust", and business investment and exports have been increasing, the Bank said, which has all contributed to economic growth that exceeded analysts' expectations.

The Canadian dollar, meanwhile, climbed more than 10 percent since May to about 81 cents US. It noted, however, that upward pressure on wages and prices remain more subdued than historical trends would suggest, which has also been seen in other advanced economies. It said the Canadian dollar has appreciated - roughly 10% in past three months - and that reflected both domestic strength and weakness in the US currency amid "significant geopolitical risks and uncertainties around" the renegotiation of the North American Free-Trade Agreement, and USA fiscal policy. It was the first reference to the Canadian dollar in a rate statement since March.

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.

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