BOC talk takes hawkish turn, loonies rises

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The Bank of Canada is sending more signals that it’s moving closer to a hike in its benchmark interest rate as the economy continues to strengthen.

Governor Stephen Poloz told the CBC in an interview broadcast Tuesday that rate cuts introduced by the bank amid the oil-price slump have done their job.

The bank reduced its trend-setting rate twice in 2015 to the very low level of 0.5% to help the economy as it struggled with the effects of the oil-price shock.

Poloz’s remarks come a day after the bank’s second-highest ranking official indicated the governing council is assessing whether the considerable stimulus from the low rates is still required.

In response to Poloz’s more hawkish tone, the loonie rose sharply this morning, trading at 75.64 cents US, up from Monday’s average price of 74.54 cents US. That puts the loonie at its highest level since late February, when it fell below 76 cents US.

Senior deputy governor Carolyn Wilkins said in recent months the economy has registered impressive, broad-based gains not seen since before the oil-price collapse nearly three years ago.

Analysts say these types of comments suggest the bank is beginning to assess when, not if, the bank might introduce its first rate increase in nearly seven years.

Yesterday at the University of Manitoba, Wilkins delivered a speech focused on diversity and Canada’s economic strength. Despite her remarks on growth, Brian DePratto, senior economist at TD bank, says in an economics report that the bank isn’t signalling imminent action on rates.

“As economic data remains robust and inflation begins to come back, we would expect a gradual monetary tightening cycle to begin, but think this is most likely to take place in early 2018,” he says.

In an industry note released after Governor Poloz’s remarks to CIBC, Nick Exarhos, director at CIBC World Markets, says: “Recent communication from the Bank of Canada [is] commensurate with the 50 basis points of tightening we have penciled in for the first half of 2018 — or slightly earlier.”

Transcontinental Media G.P.