Loonie weakens sharply after BOC drops tightening bias

The Canadian dollar suffered its decline against its US counterpart in four months after the Bank of Canada unexpectedly abandoned language in its rate-decision signalling an eventual rate hike.

By mid-afternoon in New York USD/CAD had risen 1% to 1.0390 and the Canadian dollar had weakened substantially against the majority of its commonly-traded peers.

The fall in the Loonie came after the Bank of Canada announced that it would be maintaining its benchmark overnight interest rate at 1%, where it has been held since September 2010.

That move had been widely expected, but the removal of the central bank’s tightening bias had not been predicted. Former Governor Mark Carney introduced wording to the Bank of Canada’s policy statements last April indicating an intention to raise the overnight rate in order to restrain mounting household debt. Carney’s successor Stephen Poloz had continued to insist that a future hike was in store prior to today’s decision.

The BOC now says that ‘caution about high debt levels has begun to restrain household spending,’ and sees the economy growing at a slower pace than previously thought, cutting its forecast for GDP growth for 2013 to 1.6%, down from the 1.8% cited in July.

It also downwardly-revised its forecasts for 2014 and 2015. Low inflation also now poses a problem. The central bank's statement said, ‘The fact that inflation has been persistently below target means that the downside risks to inflation assume increasing importance.’

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