The 25bp rate rise by the Bank of Canada was expected, but the accompanying statements were hawkish.
Editor’s Remarks: The “loonie”, or Canadian dollar, rose 1% after the rate hike but this was more a reaction to Bank Governor Stephen Poloz’s hawkish statement that the economy is “approaching full capacity.” This is building expectations that Canada will hike rates again. The read across to the US, where Janet Yellen is again testifying to a Senate Committee after seemingly dovish remarks about inflation on Wednesday, is that Poloz raised rates despite Canadian inflation being well short of its 2% target. Inflation data in the US has been weak recently, and equity markets tested new highs with the dollar and yields on US treasuries both falling after Yellen acknowledged this weakness on Wednesday. But she is due to speak again and the market will be following every word to see if she plumps for dovish or hawkish on US rates.