Last week we predicted that interest rates would either rise or stay the same. Today, Bank of Canada Gov. Mark Carney raised the target overnight rate to 0.50% from 0.25%. Monetary policy really is easy!
Two factors determine the rate increase. First, the inflation rate is only slightly lower than the Bank's 2% target. Second, GDP growth in the first quarter of 2010 was an astounding 6.1% annualized. Higher growth rates signal increased inflation. An increase in interest rates is designed to slow growth and reduce inflationary pressure.
So why did the Canadian dollar fall today? Normally an increase in interest rates causes capital inflows. The demand for Canadian dollars increases in the dollar rises. Statements made by the Bank of Canada regarding global growth indicate that this may not be the start of a gradual rise in interest rates as was expected.
Unemployment in the euro zone increased in May to 10.1%, Chinese manufacturing slowed in May and their housing bubble is increasing the risk of an economic slowdown.
Global economic slowdown reduces resource demand and the Canadian dollar falls.
No comments:
Post a Comment