Bank's signal on higher rates sends loonie soaring
Published Tuesday, April 17, 2012 6:42PM EDT
Last Updated Saturday, May 19, 2012 8:03AM EDT
The Bank of Canada is keeping its key overnight interest rate at one per cent, the central bank announced Tuesday, but indicated that rates could be on the rise soon, a move that sent the loonie higher.
The loonie closed at 100.99 cents US Tuesday, up 0.96 of a cent. It had earlier hit 101.76 cents US in morning trading.
The bank has held the trendsetting rate steady since September, 2010. But in its statement Tuesday, the bank suggested that the days of cheap borrowing could be coming to an end.
"In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate," the bank said.
Paul Ferley, the assistant chief economist with RBC, said Tuesday that while the bank seemed to suggest that "their next move is going to be toward higher rates," that may not be for some time yet.
"It's nothing imminent; I mean they're just flagging this possibility," Ferley told CTV News Channel.
"Our view though right now is that it's probably going to be something in 2013 rather than rates going up this year."
TD Bank chief economist Chris Alexander expects rates to slowly start rising either late this year or early in 2013.
He said the bank is "in a bind" over interest rates, explaining that low rates are fuelling economic activity, but also household debt.
Alexander said rate hikes will have to be gradual to minimize their impact.
"The one message here is they aren't going to be raising rates aggressively. When rates go up it is going to be very gradual because they are concerned about household debt," Alexander told News Channel.
"They do know that Canadians have taken on a lot of debt, and when they raise interest rates, every quarter point increase in interest rates is going to have a bigger impact on the consumer than it has in the past."
But Capital Economics analyst David Madani said the warning about a pending rate hike may be nothing more than smoke and mirrors, as Bank governor Mark Carney tries to dissuade Canadians from taking on more debt.
"If the bank did actually raise rates, we suspect that it would have to reverse course again pretty quickly as the housing market slumped," Madani told The Canadian Press.
The bank said Canada's economy and economies around the world are doing better than it had anticipated, pushing up inflation. The U.S. economy is recovering, and business and consumer confidence are improving faster than expected, it said, so it now expects that the economy will grow by 2.4 per cent in both 2012 and 2013.
"The degree of economic slack has been somewhat smaller than the Bank had anticipated in January, and the economy is now expected to return to full capacity in the first half of 2013," it said.
The Bank of Canada's overnight rate influences short-term borrowing costs and also longer-term borrowing, to a certain extent.
While the bank hasn't tweaked the rate in close to a year and a half, bank governor Mark Carney has made it clear he is uncomfortable with the rate at such a low level. He has suggested that Canadians have grown too accustomed to low rates and have taken on too much household debt.
Household debt as a proportion of disposable income was close to 151 per cent at the end of last year. Carney has said he is worried many Canadians won't be ready when interest rates move toward a more "normal" range -- meaning between 2.5 and 3.5 per cent.
Ferley said few observers expected the overnight rate to be altered.
"But what people were looking for was more how they characterized the economy. And on that front, it was a more upbeat assessment of the Canadian economy and the global environment," he said.
"Certainly, it was a more positive outlook for the Canadian economy, though not sufficiently so to alter the overnight rate."