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EUR/CAD Falls After BOC Rate Decision and ahead of ECB Decision
October 25, 2018 12:41 pmVideo
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Yesterday, the Bank of Canada (BOC) announced that it had raised the overnight interest rates by a quarter of a percentage point. This was the fifth rate hike since last summer and the rates now stand at 1.75%. This is the highest level since 2008, before the global financial crisis. The overnight rate is a rate that banks charge one another for borrowing funds overnight. This helps them to ensure liquidity in the financial sector. When it increases, the interest rates to consumers increase as well. In fact, the four biggest Canadian banks increased rates yesterday. For now, the impacts of the hike may not be very much for Canadians.
In the monetary policy statement, the bank said that:
The Canadian economy continues to operate close to its potential and the composition of growth is more balanced. Despite some quarterly fluctuations, growth is expected to average about 2 per cent over the second half of 2018. Real GDP is projected to grow by 2.1 per cent this year and next before slowing to 1.9 per cent in 2020.
The interest rates decision came a few days after data from Statistics Canada showed that inflation and retail sales in September were lower than expected. It also came after the US entered a deal with Canada and Mexico. This removed the uncertainties on trade that were there. On inflation, the bank said that:
CPI inflation dropped to 2.2 per cent in September, in large part because the summer spike in airfares was reversed. Other temporary factors pushing up inflation, such as past increases in gasoline prices and minimum wages, should fade in early 2019. Inflation is then expected to remain close to the 2 per cent target through the end of 2020. The Bank’s core measures of inflation all remain around 2 per cent, consistent with an economy that is operating at capacity.
After the interest rates decision, the Canadian dollar raised against the EUR and the USD. This is after the bank said that more hikes were necessary in the future.
Today, the EUR/CAD pair may be affected by the interest rates decision by the ECB. A hawkish tone from the ECB may take the pair higher, erasing the gains made by the loonie. In case of a hawkish ECB, this may take the pair to the 1.5200 level while a dovish ECB will likely take the pair to 1.4700 as shown below.
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