Even Canada has Succumb to Inflationary Pressures

June 10, 2008

To the surprise of the markets, the Bank of Canada has decided to leave interest rates unchanged at 3.00 percent.

Although growth contracted by 0.3 percent in the first quarter and consumer confidence fell to a 7 year low, the prospect of higher price pressures has reduced the dovishness of the BoC. According to the central bank, “if current energy levels persist, total CPI inflation will rise above 3 percent later this year.” Therefore the current level of interest rates is “appropriately accommodative.”

On growth, the BoC is not too worried as they believe that the economy has moved into excess supply. “Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected.” As a result, they expect growth to pick up this year and accelerate in 2009.

The Bank of Canada was the last central bank expected to ease interest rates and now that they too have joined forces with the rest of the world to combat inflationary pressures, it is clear that this is a battle that all central bankers feel is worth fighting and fighting now.

More Upside Likely in the Canadian Dollar

With the nasty reversal candle in USDCAD and the breakout in CADJPY, I am looking for more gains in the Canadian dollar. Now that the BoC has paused and oil prices remain high, we have a technical and fundamental reason to believe that the move in the Loonie will continue.

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