Loonie soars, TSX falls after Bank of Canada rate announcement

Sep 07, 2017, 01:50
Loonie soars, TSX falls after Bank of Canada rate announcement

Once branded a bank with an agenda to weaken the currency to support exports, the Bank of Canada's rate increase on Wednesday pushed the loonie up more than a full cent against the greenback. 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.

The Bank of Canada have made it clear that any future interest rate decision will be made exclusively on economic data releases, and as such have not given any further signals to monetary policy decisions.

The bank's rate has returned to where it was at the start of 2015, when the central bank started slashing rates to stimulate a Canadian economy that had been waylaid by the oil price crash.

"Consumer spending remains robust, underpinned by solid employment and income growth".

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- The Bank of Canada raised the overnight lending rate to 1.00% from the previous 0.75%.

The markets weren't anticipating an interest rate hike quite yet.

"It didn't say that the current level of stimulus is now 'appropriate, ' which has been a phrase used in the past and would have been a way of signaling a pause in hikes from here", Andrew Grantham, an economist with Canadian Imperial Bank of Commerce, said in a note to investors.

A second interest rate hike was already expected in 2018 but if Canada's economy continues to sizzle, it would not be surprising if the central bank aggressively acted by raising rates again earlier to try to keep a lid firmly on inflation.

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"While we do expect growth to simmer down somewhat in the second half of the year, we would readily allow that all of the economic surprises have been to the high side in 2017", BMO Financial Group chief economist Douglas Porter told the Financial Post. "I doubt the [Bank of Canada] will move, probably pointing to the dollar", Tal noted, while adding Wednesday's rate decision suggests "new and fresh thinking" at the bank, "which I think is a positive development".

"We have advanced our call for an additional 25bps tightening in the Overnight Rate to this week as a result but it would be fair to say that some (quite significant) doubts about the timing of a rate tightening remain-for numerous uncertainties noted above".

"The Bank has said that future increases will not be "predetermined", which aims perhaps to indicate to the markets that they will not increase the rate a quarter point at each meeting, " wrote CIBC in a note to its clients.

The bank, for its part, did make mention of the soaring loonie - pointing to the weaker USA dollar and the strengthening Canadian economy. The bank ended with, "given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates".

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