Canada raises rate to six-year high
Tuesday, 17 July 2007
Daina Lawrence in Ottawa
CANADA'S central bank raised its key interest rate last week amid growing concern about inflationary pressures and a soaring Canadian dollar, which is cutting into demand for exports and hurting manufacturers.
The Bank of Canada raised the overnight rate to 4.5 per cent, up one quarter of a percentage point, in the first increase since May last year. The increase -- to a six-year high -- was widely predicted because core inflation has been above the bank's 2.0 per cent target for the past nine months.
"Some modest further increase in the overnight rate may be required to bring inflation back to the target over the medium term," reported the bank. "The main upside risk is that household demand in Canada could be stronger than expected. The main downside risks are related to the higher Canadian dollar and the ongoing adjustment in the US housing sector."
JPMorgan agrees that this may be only the beginning of the bank's interest rate rises.
The financial services group said: "We are expecting another 25 basis-point rate hike on September 5 to 4.75 per cent, followed by a brief pause to gauge the effect of both the higher interest rates and the recent appreciation of [the Canadian dollar]."
The currency recently hit a 30-year high of 95.74 cents to the US dollar but fell later to 94.92 following the announcement. It is expected to climb to 96 cents by autumn. Manufacturers and exporters have watched the rising dollar with increasing worry.
Perrin Beatty of Canadian Manufacturers & Exporters said the impact of the rate rise was two-fold: "There's the continued increase of pressure on the dollar for manufacturers and the impact where companies are borrowing. Our major concern has been the velocity of change despite the scrambling manufacturers have been doing, taking a range of measures including shedding jobs and closing plants."
Mr Beatty added he was worried this was too much too soon: "The speed and scale has left the manufacturers at a disadvantage."
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— FT Syndication Service
CANADA'S central bank raised its key interest rate last week amid growing concern about inflationary pressures and a soaring Canadian dollar, which is cutting into demand for exports and hurting manufacturers.
The Bank of Canada raised the overnight rate to 4.5 per cent, up one quarter of a percentage point, in the first increase since May last year. The increase -- to a six-year high -- was widely predicted because core inflation has been above the bank's 2.0 per cent target for the past nine months.
"Some modest further increase in the overnight rate may be required to bring inflation back to the target over the medium term," reported the bank. "The main upside risk is that household demand in Canada could be stronger than expected. The main downside risks are related to the higher Canadian dollar and the ongoing adjustment in the US housing sector."
JPMorgan agrees that this may be only the beginning of the bank's interest rate rises.
The financial services group said: "We are expecting another 25 basis-point rate hike on September 5 to 4.75 per cent, followed by a brief pause to gauge the effect of both the higher interest rates and the recent appreciation of [the Canadian dollar]."
The currency recently hit a 30-year high of 95.74 cents to the US dollar but fell later to 94.92 following the announcement. It is expected to climb to 96 cents by autumn. Manufacturers and exporters have watched the rising dollar with increasing worry.
Perrin Beatty of Canadian Manufacturers & Exporters said the impact of the rate rise was two-fold: "There's the continued increase of pressure on the dollar for manufacturers and the impact where companies are borrowing. Our major concern has been the velocity of change despite the scrambling manufacturers have been doing, taking a range of measures including shedding jobs and closing plants."
Mr Beatty added he was worried this was too much too soon: "The speed and scale has left the manufacturers at a disadvantage."
.........................................
— FT Syndication Service