Canadian dollar leaps on central bank's rate hike hints

The BoC's Senior Deputy Governor, Carolyn Wilkins, stated that Canadian first-quarter growth was "pretty impressive" and would lead the central bank to consider whether current low rates would still be required.

The Bank of Canada indicated it is looking at the possibility of raising interest rates as the nation's economic recovery picks up steam. This time is different: Carolyn A. Wilkins, the senior deputy governor, took the stage and sent USD/CAD almost 200 pips to the downside. Analysts said these and other comments suggest the central bank is beginning to assess when, not if, the bank might introduce its first rate increase in almost seven years. The slump prompted the central bank to cut interest rates twice in 2015 to a near-record low 0.50 per cent to help bolster the economy, which slipped into a brief recession.

In today's speech to The Associates of the Asper School of Business in Winnipeg, Manitoba, Wilkins said that the economy has adjusted to lower energy prices, "One sign of progress in adjusting to lower oil prices is the bounce-back in capital expenditures in the oil and gas sector", she explained. "You don't want to have to slam on the brakes at the last second".

She pointed to unknowns surrounding USA economic policy, Canada's recent below-target inflation readings as well as employment weaknesses in wage growth and the number of hours worked.

The central bank is now engaged in discussions and assessment of the outlook ahead of the next monetary policy meeting in the second week of July. The bank has not boosted its key overnight rate in seven years.

Despite the recent good news, Wikins said slack in the economy is still translating into inflation that is below the bank's target, while wage gains have been moderate.

"The hawkish nature of the speech is the first acknowledgment from the bank that the next move is likely to be a hike", CIBC's Royce Mendes wrote in a research note to clients.

A majority of Canadian market watchers anticipated rate increases to start in early 2018, based on improving economic data. "And the figures show business investment growing again", she said.

"That said", Ms. Wilkins added, "when you look at the economy from different perspectives, there is reason to be encouraged".

Following months of improving economic indicators, a growing number of analysts have been saying it's increasingly hard for the bank to hold back from raising its trend-setting rate.

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