By James Langton
(May 17 – 09:00 ET) – The Bank of Canada has raised rates 50 basis points as expected, hiking the overnight rate to 5.75%. The operating band for the overnight rate was also increased. The bank rate is now 6%.
Most traders expected the Bank would follow the U.S. Federal Reserve Board with a 50 bps hike and so it was factored into markets. However, nervous traders began selling the loonie this morning, fearing that the Bank would only go 25.
The bank cited, “the strength of demand in Canada from both international and domestic sources, some early signs of pressures on capacity limits, and the need to lean against these trends in order to preserve the low and stable inflation environment that has been benefiting the Canadian economy.”
It acknowledged the importance of following the U.S. in this move, too. “An important source of this strong growth in demand has been the U.S. economy. Yesterday’s action by the U.S. Federal Reserve to raise its target level for the federal funds rate by 50 basis points underscores the strength of that economy and the continued risk of demand and inflation pressures spilling over from the United States into Canada.”
The bank says the move, “reflects the judgment that a tightening in monetary conditions in Canada is warranted, given that the underlying momentum of demand growth and the high levels of activity risk putting excessive pressure on the economy’s capacity limits, and thus on inflation.”