Loonie hits 4-month low as Bank of Canada holds key interest rate

TORONTO –

The worth of the loonie hit a four-month low in contrast with the U.S. greenback on Wednesday, however some consultants say Canadian shoppers should not count on their wallets to take a serious hit.

The Canadian greenback traded at 72.54 U.S. cents on Wednesday, the weakest stage in additional than 5 months.

CIBC chief economist Avery Shenfeld mentioned the weak loonie is reflective of the U.S. Federal Reserve getting extra aggressive on rate of interest hikes whereas the Bank of Canada holds its key fee regular for the primary time in a 12 months.

While import price hikes might result in increased costs for gadgets reminiscent of groceries, he mentioned the impact on Canada’s inflation fee needs to be minimal.

“This is pretty small potatoes in terms of the inflation rate. We’re talking a decimal place here or there,” Shenfeld mentioned.

“Even if something is an imported good, the import price doesn’t tend to pass on all the exchange rate moves. It tends to show up in things like fresh fruits and vegetables, but if you’re talking about a T-shirt at the department store, it was probably made outside North America.”

The Bank of Canada held its key rate of interest at 4.5 per cent Wednesday based mostly on its evaluation of latest financial information. Shenfeld famous the central financial institution signalled it will not reply to a modest additional weakening of the forex.

“Given the choice, I think Canadians would be happier not to see another rate hike than to protect the Canadian dollar from another cent or two slide,” he mentioned.

Darcy Briggs, senior vice-president and portfolio supervisor at Franklin Templeton Canada, mentioned he anticipated the loonie would proceed to commerce gentle till the U.S. Federal Reserve reaches the tip of its tightening cycle.

“That’s the thing with currencies. They make some pretty dramatic moves pretty quickly,” he mentioned. “They’ll kind of lay in limbo and then volatility spikes.”

Briggs mentioned that might make life costlier within the meantime.

“If the Canadian dollar is depreciating, and it’s depreciating against the number of currency baskets, then any products that we import, by definition, will be more expensive because we’re paying it with a cheaper Canadian dollar,” he mentioned.

“That will take a bite out of consumption and it’ll actually factor into inflation.”

University of Toronto economist Angelo Melino predicted the divergence between the Canadian and U.S. rates of interest to final a minimum of 10 months.

But whereas the weakened loonie might make merchandise denominated in U.S. {dollars}, costlier, Melino mentioned the impact on the Canadian inflation fee will not be main.

“They’re going to matter for specific goods and services,” he mentioned.

“If you’re planning to go to Florida for vacation, or Disneyland, you’re going to see it right away.”

Should the Canadian greenback stay low for an prolonged interval, Melino mentioned that might create a shift in demand away from U.S items and providers towards Canadian ones.

“Both Canadians and Americans will be buying goods and services produced in Canada and that tends to be good for Canadian output, but also inflationary,” he mentioned.

This report by The Canadian Press was first revealed March 8, 2023.