Canadian Dollar Falls Sharply After Bank of Canada Holds Interest Rates Steady

The Canadian dollar fell sharply after the Bank of Canada announced that it is keeping its key interest rate on hold – trading at 78.30 cents U.S., down 0.65 of a cent.

The Bank of Canada said Wednesday that it is leaving its benchmark interest rate unchanged following two straight hikes since July. The central bank warned that it expects to stick to its rate-hiking path, although at a more tentative pace going forward.

In a scheduled announcement, the Bank of Canada said it held off increasing interest rates this time, in part, because it expects the recent strength of the Canadian dollar to slow the rise in the pace of inflation. The drop of the Canadian dollar came as the Toronto Stock Exchange’s S&P/TSX composite index fell 50.37 points to 15,854.77.

“The loonie seems to have had its peak when the Bank of Canada was raising interest rates and the reports of year-over-year economic growth were coming out stronger than people had expected,” wrote Norman Levine, Managing Director of Portfolio Management Corp, in a note to clients. “Now people are seeing that rates aren’t going to go up as fast in Canada as they were before and that economic growth in Canada will probably be lower next year than it was this year.”

The central bank also pointed to persistent unknowns around geopolitical developments as well as U.S.-related fiscal and trade policies, such as the renegotiation of the North American Free Trade Agreement (NAFTA) in announcing its decision to hold interest rates steady.

“While less monetary policy stimulus will likely be required over time, the governing council will be cautious in making future adjustments to the policy rate,” the bank said in a written statement.

The Bank of Canada stressed that it will pay particular attention to incoming data to assess four key areas: the unfolding impact of higher interest rates on indebted households, the evolution of the economy’s capacity, wage growth and inflation. Its next rate announcement is scheduled for December 6th.