The BOC hiked rates for the second time in a row, pushing their benchmark rate up by another 25 basis points this July. No surprises there! After all, the Canadian economy has been on a roll lately. For one thing, inflation seems to be rising at a healthy pace as it chalked up a 0.3% monthly increase in May. In fact, core inflation is just a couple of notches away from meeting the central bank’s 2% annual inflation target.
Aside from that, other sectors of the Canadian economy seem to be working like a well-oiled machine. Consumer spending, as evidenced by the 4.6% surge in retail sales for the second quarter, suggests that domestic demand remains strong as ever. This strength in the consumer sector is supported by the recent improvements in the labor market, which boasted of a drop in unemployment from 8.1% in May to 7.9% in June.
It wasn’t all fine and dandy though. In the accompanying statement, the BOC cited that international factors are putting downside risks on global economy. They said that recovery in the US, although ongoing, is unbalanced. There are some sectors that are improving, but consumer confidence and the labor market remains weak. They also cited that the planned austerity measures of European governments could have adverse effects on the pace of global economic recovery.
This made the overall tone of the rate decision dovish, as the BOC decided to downgrade its GDP growth outlook to 3.5% from 3.7% in 2010 and to 2.9% from 3.1% in 2011. With inflation stabilizing, is the chance for another rate hike in their next meeting… unlikely?
Listening to all those dovish comments, I’m leaning towards a pause. Quite frankly, I don’t blame the boys over at Wellington Street for being a little cautious. Even though domestic demand seems to be strengthening, it’s hard to ignore the risks that both the US and Europe pose to global recovery. And as I’ve said time and again, the major economies of the world have to work hand-in-hand if they plan to reach sustainable global recovery. The BOC will have to take this into consideration before they decide to raise rates yet again.
Now, if the bank decides to pause on any rate hikes, it may cause bullish sentiment towards the Loonie to die down a bit. And who knows what may happen then? If we do see weakness in global recovery, we may just see safe-haven currencies like the dollar and yen trample all over the Canadian dollar!