Financial markets tend to get edgy sitting still, but Bank of Canada Governor Carney is a man in no hurry to act. Drawing a parallel with Australia, where a rate hike came earlier than expected, investors had been pushing up Canadian short-term yields in anticipation that Canada would also raise rates. Of course, when fixed income investors start to expect an earlier rate hike, that exerts upward pressure on the dollar which makes such a move less likely. Therefore, the Bank’s message to those expecting an early rate hike in Canada was “not so fast”.

Clearly, the Bank takes currency impacts on growth and inflation very seriously. After citing a list of fresh positives—including better-than-expected global growth and improvements in financial market conditions—the Bank asserted that these will be “more than offset” by the drag from persistent Canadian dollar strength.

The Bank reinforced its pledge to keep rates on hold.

So, in its most recent interest rate announcement, the Bank reinforced its pledge to keep rates on hold at least until after June of 2010. Since the timing of rate moves is geared to the timing of getting inflation back to the 2% target, if anything, the Bank may even add a few months to when it anticipates pulling the trigger on the first rate hike.

While CIBC World Markets is roughly in line with the Bank of Canada’s growth projection for the balance of this year, we’re not as optimistic about Canada’s ability to shrug off a likely slowing in US growth in 2010. If we’re right, it will take even longer than the Bank’s forecast to get back to full employment and target inflation. Therefore, if the US keeps rates on hold throughout 2010, it’ll be difficult for the Bank of Canada to move first, as long as the Canadian dollar is near parity.

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Tags: Dollar, interest rates, recovery