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Bank of Canada Increases Interest Rate by .25%

The Bank of Canada has increased the overnight lending rate 25 basis point to .75%. Simultaneously they have cut the economic growth forecast from 3.7 per cent annualized pace to 3.5 per cent rate that policy makers projected in April.

The move emphasized the relative strength of the Canadian economy. Note, we did say relative strength, as given hardship in our primary trading partners (less China) the economy is growing at a fickle pace.

The increased interest rate is one sign of strength, however, the comments on the slowing growth provided mixed signals for the market.

Usually when the interest rate appreciates the demand for domestic currency increases. However, the declining prospect for the upcoming months actually pushed the Canadian dollar lower.

Some economists are predicting there is enough momentum in the domestic economy to justify another rate hike or two before the end of the year. Although some question whether the moderate growths in job creation are really an indicator of economic strength.

Inflation will stay near the central bank’s 2-per-cent target throughout the projection period, policy makers said, but the economy won’t return to full capacity until the end of 2011, or six months later than they had forecast in April.

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