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Loonie rallies to 11-month high after BoC hikes, strikes hawkish tone

The loonie soared higher on Wednesday after the Bank of Canada raised interest rates for the first time in seven years and issued comments that suggest further tightening to come.

The Canadian dollar spiked 0.8 per cent to hit a 11-month high of C$1.2817 against the greenback in response. The currency had been nursing a 0.2 per cent decline prior to the bank’s decision.

While investors had been bracing for the BoC’s quarter point rate hike, the comments in its accompanying statement — which played down the recent drop-off in inflation and emphasized the strengthen of the economy’s recovery — were more hawkish than the market was forecasting.

As the bank noted:

Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed. The very strong growth of the first quarter is expected to moderate over the balance of the year, but remain above potential. Growth is broadening across industries and regions and therefore becoming more sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding. Household spending will likely remain solid in the months ahead, supported by rising employment and wages, but its pace is expected to slow over the projection horizon. At the same time, exports should make an increasing contribution to GDP growth. Business investment should also add to growth.

While the BoC acknowledged that GDP growth is likely moderate over the next two years, it also reiterated its expectations for inflation to return to its 2 per cent target by the middle of next year, which would justify its case for further monetary tightening.

Governing Council judges that the current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy. Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities.

Wednesday’s rally take the Loonie’s year to date advance against the buck to 4.8 per cent.