Bank of Canada Rate Decision Due Tuesday

Early indications are that the Canadian dollar could decline ahead of tomorrow’s Bank of Canada interest rate announcement. Despite recording a 3.9 percent increase in Gross Domestic Product for the first three months of the year, most observers expect Governor Mark Carney to announce that the Bank of Canada will not raise rates beyond the current 1 percent. This could have investors selling the dollar for currencies offering higher yields.

While few expect a rate increase, close attention will be paid to Carney’s statement in the hope that the Governor will provide a signal as to when he expects rates to increase. Most analysts feel that October is the earliest we can expect the Bank to introduce a rate hike as the short-term forecast is for the Canadian economy to slow slightly from the first quarter’s robust pace.

It was not that long ago that market participants were convinced that Canada was about to enter a period of sustained rate increases. Indeed, starting last June the Bank did introduce three successive quarter point rate hikes but the policy was abandoned after the Canadian economy slowed faster than expected.

Despite this, the Organization for Economic Co-operation and Development (OECD) recently urged the Bank of Canada to return to a policy of rate hikes. The OECD believes that Canada’s interest rate is currently too low and as a result, borrowers are taking on debt levels that would otherwise be beyond their means. Should these rates rise significantly later on, the OECD warns that a dramatic rise in the default rate is likely and this could place the Canadian economy at risk.

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