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Thursday, August 25th, 2016

Rate Hikes on Hold until 2013 – BMO Economics

Business owners need to prepare for continued currency fluctuations

TORONTO, October 4, 2011 – Rate hikes will resume in the first part of 2013 instead of the second half of 2012, according to the “Rates Scenario” report released today by BMO Capital Markets Economics.

“As global economic risks have escalated, casting commodity prices and the Canadian dollar much weaker, the Bank of Canada’s diminishing tightening bias has probably diminished further,” said Michael Gregory, Managing Director and Senior Economist, BMO Capital Markets. “We now judge that the resumption of rate hikes will be an early-2013 affair.”

Mr. Gregory noted that, with recession risks building on both sides of the Canada-U.S. border, and the next six months being particularly critical, the odds of Bank of Canada easing are building as well. “The market is currently pricing in a little less than two 25 basis-point rate cuts by April, 2012. However, with core CPI inflation not far below its 2 per cent target, the loonie, now more than 6 cents weaker than where the Bank had assumed in its projections, and a continued well-functioning domestic bank credit creation process, we judge the policy easing bar remains high. Short of signs of imminent recession, the Bank should remain on hold.”

BMO’s “Rates Senario” report also projected what is on the horizon for the Canadian dollar. “The loonie has succumbed to the double whammy of increasing risk aversion and decreasing commodity prices, amid shifting market expectations of Bank of Canada policy,” noted Mr. Gregory. “With these factors continuing to persist well into next year, we look for the Canadian dollar to weaken further, settling around a monthly average of 93 US cents. During the second half of 2012, with global economic and commodity price prospects improving, the currency’s fortunes should shift with a flight plan back to parity by January 2013.”

“Over the past year, Canadian businesses have shown their resiliency; many have adjusted their strategies to take advantage of the higher loonie to increase productivity by sourcing less costly imports from the US,” said Cathy Pin, Vice President, Commercial Banking, BMO Bank of Montreal. “As the currency markets continue to shift, business owners will need to update their approach to hedge and mitigate risk, as well as their strategies for any expansion plans north and south of the border,” added Ms. Pin.

The full report can be found at www.bmocm.com/economics

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