Interest Rates: a bad thing

Interest-rate suspense hurts Canadian dollarLast Updated Mon, 06 Mar 2006 16:15:07 EST
CBC News
The hard-charging Canada dollar took a rest on Monday as traders waited to see whether the Bank of Canada will extend its string of interest-rate hikes to five in a row – and, if so, what hints it will drop about future increases.
The dollar, which hit a 14-year-high of 88.49 cents US last Thursday, was down more than a third of a cent at 87.73 from Friday's close of 88.11. Rising interest rates tend to strengthen the currency by encouraging foreigners to buy Canadian dollars to invest at the higher rates.
On the rate front, the central bank has raised its target for Canadian short-term interest rates by a quarter of a percentage point each of the last four times out, pushing the benchmark from to 3.5 per cent in January to 2.5 per cent in late summer.
With another announcement scheduled for Tuesday, one strategist was on record as saying a fifth quarter-point jump was "essentially a slam dunk."
"Markets are fully pricing in the move, and analysts are unanimous on the bank's decision as well." Marc Lévesque of TD Securities said in a report issued on Friday.
"The real issue is not the decision itself. It's what the bank will say in its press release, and whether there are more moves to come."
The central bank, which seeks to use interest rates to steer the economy between inflation and recession, makes eight regularly scheduled rate announcements a year, but also reserves the right to change rates without warning if it feels the need.
Its official target is the overnight rate, a rate charged on one-day loans between ordinary banks. The announcement (up, down or no change) is an expression of the bank's wishes, enforced by its power to influence markets by buying and selling government securities.
FROM FEB. 10, 2006: Canada's trade surplus balloons on natural gas exports
TD's Lévesque said Canada's current economic results, including its strength in business investment, exports and job creation, point to a sixth quarter-point increase in April. "The only real wild card at this stage is the behaviour of the Canadian dollar," he said.
A strong dollar tends to hurt exports and jobs by making Canadian goods more expensive to buyers using foreign currencies. Lévesque said the central bank "will certainly take notice" if the dollar continues to rise on what he called "pure momentum."