Bank of Canada hikes rates, sees slower recovery

Wed Sep 8, 2010 10:23am EDT
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada raised its benchmark interest rate for a third consecutive time on Wednesday and sounded surprisingly hawkish despite predicting a more gradual than expected economic recovery.

The central bank nudged its overnight rate target up 25 basis points to 1 percent and, contrary to most economists' expectations, did not signal a pause for its next decision in October. It said rates remained "exceptionally stimulative" but kept all options open due to doubts about the U.S. and global recoveries.

"Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook," it said in a statement.

The Canadian dollar jumped to a session high against the U.S. currency, touching C$1.0369 to the U.S. dollar, or 96.44 U.S. cents from C$1.0486 to the U.S. dollar just before the announcement.

Short-term money market rates and bond yields also jumped. The yield on the rate sensitive two-year Canadian government bond rose to 1.377 percent from 1.266 percent just before the news.

"Generally it's a very upbeat statement, it's a little more hawkish than I anticipated," said Derek Burleton, Deputy Chief Economist at TD Bank Financial Group. "This will cast some uncertainty about whether the bank will pause at the next fixed announcement date."

The Bank of Canada has raced ahead of its Group of Seven peers in raising borrowing costs after the global financial crisis. It lifted its policy rate on June 1 from an all-time low of 0.25 percent and raised rates again on July 20.

The U.S. Federal Reserve, by contrast, has raised the prospect of further easing and counterparts in Europe and Japan are likewise far from ready to tighten monetary policy.   Continued...

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