Instant View: Bank of Canada raises rates, sees slower recover

TORONTO (BestGrowthStock) – The Bank of Canada raised its key interest rate on Tuesday, as expected, for the second straight month but cautioned that the domestic and global recoveries will be slower than previously expected in a hint that any further hikes may be gradual.

COMMENTARY:

SAL GUATIERI, SENIOR ECONOMIST, BMO CAPITAL MARKETS

“The rate move was widely anticipated and the bank did revise down it’s outlook for growth. It sees the economy getting back to full employment a little later than it previously though — in fact, a couple of quarters later, so that will dampen the outlook for future rate increases.”

“They are raising rates because the economy is still growing at a rate that is reducing the unemployment rate and shrinking the slack in the economy and as a result, the bank needs to get interest rates closer to neutral levels by the time the economy gets back to full employment, or else inflation will shoot higher.”

“The bank is also concerned about the growth outlook and the risks to the growth outlook. So, the bottom line is that the bank will likely continue to raise rates but not necessarily at every meeting.”

“It looks like all that fiscal retrenchment coming down the pipeline in Europe and eventually in the United States will dampen the economic outlook externally and that, of course, has implications for Canada.”

“I would not expect pronounced weakness (in the Canadian dollar), but it is certainly in line with the view that the Bank of Canada might not raise interest rates at every subsequent meeting over the next year.”

CAMILLA SUTTON, CURRENCY STRATEGIST AT SCOTIA CAPITAL

“The statement sounds somewhat dovish but it is in line with what we expected. Our view is we see another hike this year so they close the year at 1 percent. I think it’s somewhat in line with that. He’s sort of left the door open to both sides and noted that certainly the pace of global growth has slowed but that activity in Canada is ongoing.”

“They decreased their growth outlook but only marginally. … but all in all they’re saying that inflation is still broadly in line with the bank’s April projection. They are an inflation targeting central bank.”

SHERYL KING, CHIEF CANADIAN ECONOMIST, BANC OF

AMERICA-MERRILL LYNCH

“Obviously, in-line with expectations … It looks like they have actually folded into their forecast the concern they had expressed in June, so it is now their base case. I think this is consistent with a very, very gradual removal of policy stimulus.”

“In terms of the market reaction. I think the markets were widely expecting a dovish commentary. It may result in some modest further rallying in the bond market. The Canadian dollar, I don’t think will be very much moved by this.”

MARKET REACTION

– The Canadian dollar weakened against its U.S. counterpart, falling as low as C$1.0572 to the U.S. dollar, or 94.59 U.S. cents, from around C$1.0523, or 95.03 U.S. cents just before the announcement. It closed on Monday at C$1.0549 to the U.S. dollar, or 94.80 U.S. cents.

– Short-term money market rates rose after the tightening, but bond yields mostly fell. The yield on the two-year Canadian government bond fell to 1.48 percent from 1.514 percent just before the news.

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(Reporting by John McCrank; Jennifer Kwan and Euan Rocha; Editing by Jeffrey Hodgson)

Instant View: Bank of Canada raises rates, sees slower recover