Higher Interest Rates

Following a recent notification from the Bank of Canada, the central bank of the country, that is intended to increase the interest rates, the Canadian dollar witnessed the largest gain on a single day on Tuesday last ever since July 2009. Precisely speaking the Canadian dollar secured 1.58 cent compared to the US 100.12 cents.

Although the Bank of Canada did not change its fundamental lending rate on Tuesday, it has informed that the low interest rate policy has been following with a view to revitalize the economy during the recent global recession would not continue for long. As of now, proving the economists' predictions right, the bank has retained its immediate or overnight interest rate at the historically low 0.25 per cent.

A recent statement issued by the Bank of Canada said that keeping in view the recovery of the economy as well as the inflation soaring higher than the bank's two per cent objective, there is no longer any requirement for the all-time low interest rates. The statement further informed that the degree and time of any modification in the fundamental rate will rely on the outlook for financial goings-on as well as inflation. In addition, the bank observed that development is progressing a bit faster compared to its expectations in the previous year, enhancing the possibility of an increase in the lending rate during the early part of this summer.

Deputy chief economist with BMP Capital Market, Douglas Porter remarked during a commentary that precisely speaking, the recent statement issued by the Bank of Canada is a remarkable change in attitude of the bank and it does not discard the possibility of a 50 basis point moves. According to Porter, following the bank's statement, it is likely that the lending rates would be raised during June next. At the same time, he observed that the bank was obviously presently more worried regarding inflation than it had indicated earlier.

It may be noted here that the bank usually fixes an objective level for the overnight rate that is regularly referred to as the key interest rate or the key policy rate since it points to the bank's assessment regarding the economy. In other words, the term overnight rate denotes the rate of lending that the main financial institutions charge one another on loans taken for a period of one day. As the global economic slump deteriorated, the Bank of Canada reduced the overnight interest rate from 0.50 per cent in April 2009 to an all time low lending rate of 0.25 per cent to perk up the country's economy. In October 2007, the overnight lending rate was at its recent peak at 4.5 per cent.

According to the statement, the Bank of Canada's 'extraordinary policy' of exceptionally small lending rate was launched with a view to perk up the economic revival. Presently, the Bank of Canada is predicting a growth of 3.7 per cent during 2010, suggesting more potent global economic actions and robust real estate, especially housing, activity all over Canada. The bank concluded that the policy incentive enhanced several expenditures during the period between the later part of 2009 and early 2010.

The Bank of Canada has been predicting that the economic progression in Canada will slacken to 3.1 per cent in the year 2011 and further to 1.9 per cent in 2012.

Opposing demands

The Bank of Canada governor Mark Carney has been coping with opposing demands - the requirement to manage inflation with a higher lending rate; the necessity to maintain the cost of credits low with a view to promote industry as well as end user borrowing and a robust dollar. Any rise in the lending rate of the bank may possibly make the dollar even stronger affecting exports as well as employment opportunities. Acknowledging that the economic progression was vigorous, on Tuesday last, the Bank of Canada cautioned regarding the negative aspects - the unrelenting potency of the Canadian dollar, the comparatively poor production operation of Canada and the complete small level of requirement from the United States.

While Mark Carney had articulated his worries regarding inflation in March last, the Bank of Canada has now stated that it is anticipating the inflation rate to improve to some extent during the second quarter of the current fiscal year and continue to be somewhat higher than its target two per cent inflation rate during the present year prior to alleviating during the second half of the subsequent year.

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