Bank of Canada first in G7 to hike rates

Tue Jun 1, 2010 4:30pm EDT
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada raised its key interest rate on Tuesday, the first G7 industrialized economy to do so after the global recession, but said the European debt crisis made its next move highly unpredictable.

The rate hike, to 0.5 percent from 0.25 percent, is a response to two quarters of extraordinarily strong growth at home. But the bank cautioned investors against betting on an uninterrupted tightening campaign, due to the euro zone fiscal problems and an uneven global recovery.

"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," the central bank said in a statement.

The rate hike itself was widely expected. In a Reuters poll of 40 analysts, 32 had forecast a quarter-point rate hike.

"No surprise in the decision but the tone was slightly more dovish than we or the markets had anticipated," said Millan Mulraine, economics strategist at TD Securities.

"Of course we continue to mention our bias for them to raise rates at the next few meetings ... It certainly suggests to us that the bank is not positioning for 50 basis point increases, at least not in the near term, as the market at some point may have priced in," he said.

The lack of a clear message on further rate hikes caused the Canadian dollar to ease after the news to as low as C$1.0556 to the U.S. dollar, or 94.70 U.S. cents, from C$1.0498, or 95.26 earlier in the day. It later recovered to C$1.0490 to the greenback.

Yields on overnight index swaps, which trade based on expectations for the central bank's key policy rate, suggest there is a 67.7 percent chance of a 25 basis point hike at the next announcement on July 20.   Continued...

<p>Bank of Canada Governor Mark Carney speaks during a news conference upon the release of the Monetary Policy Report in Ottawa April 22, 2010. REUTERS/Chris Wattie</p>