Bank Of Canada Raises Interest Rate To The Highest Level Since 2008

Key Insights

• Bank of Canada raised the key interest rate from 3.75% to 4.25%.
• The Bank will evaluate whether it is appropriate to raise rates at the next meeting. 
• USD/CAD moved lower after the Interest Rate Decision. 

BoC Raises Interest Rate To 4.25%

Bank of Canada has just announced its Interest Rate Decision. BoC increased the rate by 50 bps from 3.75% to 4.25%, in line with the analyst consensus.

The Bank noted: “In Canada, GDP growth in the third quarter was stronger than expected, and the economy continued to operate in excess demand. Canada’s labour market remains tight, with unemployment near historic lows.”

BoC added that inflation remained too high and that short-term inflation expectations were elevated. Just like the Fed, BoC is worried that if inflation will become entrenched if it remains at high levels for too long.

Canada’s central bank said that it would consider “whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”

BoC will clearly need more time to evaluate whether the current policy is working well. The goal is to put significant pressure on demand in order to push inflation to the 2% target.

BoC’s next move will likely depend on the situation in the world economy. Commodity exports play an important role in the Canadian economy. If the world economy falls into recession, BoC will have to be less hawkish.

USD/CAD Declines After BoC Decision

USD/CAD made an attempt to settle below the 1.3600 level after the release of the BoC Interest Rate Decision. However, it failed to develop sufficient downside momentum and rebounded towards 1.3620.

While BoC comments may be interpreted as somewhat hawkish, it remains to be seen whether they will be hawkish enough to provide material support to the Canadian dollar in today’s trading session.

There are no material surprises in BoC’s words, so traders may stay focused on the general dynamics of the U.S. dollar and commodity markets.

For a look at all of today’s economic events, check out our economic calendar.