Loonie gains after BOC keeps rates on hold and sees Q3 rebound

The Canadian dollar jumped after the Bank of Canada announced on Wednesday that it left its key interest rate unchanged despite growing uncertainty over the outlook for the economy following a run of weak economic data for April.

The BOC kept its benchmark rate at 0.5 per cent, which was widely expected by many economists. However, what boosted the loonie was the upbeat statement from the Bank. In a statement accompanying its decision, the BOC took note of the recent rebound in crude price and growing signs of strength in the US economy.

And while it warned that the forest fires that ravaged northern Alberta earlier this month are expected to cut 1.25 percentage points off real GDP growth in the second quarter, it also predicted the economy will rebound in the third quarter.

The comments about a third quarter rebound helped the Canadian dollar extend its day’s gains against the greenback following the decision. The currency rose by as much as 0.5 per cent to 1.3052 – a one week high.

The statement said:

In Canada, the economy’s structural adjustment to the oil price shock continues, but is proving to be uneven…The second quarter will be much weaker than predicted because of the devastating Alberta wildfires.

The Bank’s preliminary assessment is that fire-related destruction and the associated halt to oil production will cut about 1 1/4 percentage points off real GDP growth in the second quarter. The economy is expected to rebound in the third quarter, as oil production resumes and reconstruction begins. While the Canadian dollar has been fluctuating in response to shifting expectations of US monetary policy and higher oil prices, it is now close to the level assumed in April.

The rate decision comes after the Canadian job market cooled unexpectedly and sharply last month. The strength of the economy has also been put into question after the country posted a record monthly trade deficit in April amid a plunge in exports to the US.

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