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The Canadian dollar (CAD) softened against the US dollar (USD) on Wednesday following a Bank of Canada (BoC) announcement.
In a recent press release, the Bank of Canada announced that it will be raising interest rates by 25 basis points, citing persistently elevated inflation and increased resilience from the United States and Europe in terms of an economic slowdown. However, this news did not sit well with the Canadian dollar, which saw a negative reaction from markets and pushed the currency lower against the US dollar.
According to analysts, the labor market in Canada remains tight with low unemployment levels, and despite some softening of inflation, earnings are not falling at the rate that many had expected. The expectation is that higher interest rates will slowly filter through to the economy, reducing household spending and bringing the country closer to the 2% inflation target range in the long term.
In the statement, the BoC emphasized its willingness to further tighten rates if necessary, stating, “Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target, and remains resolute in its commitment to restoring price stability for Canadians.” However, there is a consensus among markets that this interest rate hike will be the peak for 2023, as shown in the table below.
How Will the Move Affect the Canadian Dollar in the Long Term?
Overall, the BoC’s decision to raise interest rates reflects the central bank’s commitment to maintaining price stability for Canadians, but it remains to be seen how this move will affect the economy and the Canadian dollar in the long term.
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