Investors Flock to the Loonie as Bank of Canada Raises Rate

September 9, 2010 Updated: September 9, 2010

[xtypo_dropcap]T[/xtypo_dropcap]he loonie got a lift on Wednesday when the Bank of Canada raised its key overnight rate by one-quarter of a percentage point. It was the third straight time this year the bank raised the overnight rate, bringing it to 1 percent.

The move, along with rising oil prices, lent confidence to investors who moved in to bring the loonie up one cent against the U.S. dollar in trading on Wednesday, after a fall the day before over concerns about troubles in the European banking system.

But Canada’s central bank put a qualifier on any overly optimistic expectations that the rate rise means the country is out of the troubled waters of the global economic downturn.

In announcing the increase, the bank said that while global economic recovery is proceeding, it remains uneven and developed markets are seeing weak growth, singling out the United States in particular.

“In the United States, the recovery in private demand is being held back by high unemployment and recent indicators suggest a more muted recovery in the near term,” said the statement.

“The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity. Inflation in Canada has been broadly in line with the Bank’s expectations and its dynamics are essentially unchanged.”

Meanwhile, economic activity in Canada was slightly below the bank’s expectations though consumption and investment met anticipated targets.

“Going forward, consumption growth is expected to remain solid and business investment to rise strongly. Both are being supported by accommodative credit conditions, which have eased in recent weeks mainly owing to sharp declines in global bond yields.”

Canada was the first of the Group of Seven countries to raise its overnight rate back in June. The next scheduled announcement for the overnight rate target is Oct. 19. Predictions are mixed on what the bank may do given the relative uncertainty in Europe and indications that some regions in the U.S. are faltering.

The central bank said any future increases would need to be carefully considered “in light of the unusual uncertainty surrounding the outlook.”