The Canadian dollar rallied on Tuesday after the Bank of Canada signalled its intention to start withdrawing economical stimulus in the second quarter.
Although the BOC decided to keep the overnight rate unchanged at .25% as expected, its new remarks represent a notable shift ever since the start of the economical crisis. The Bank finally considers Canada’s economy is ready for a change in monetary policy.
"With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus," the Bank wrote its rate statement.
The Bank expects the Canadian economy to return to full capacity in the second quarter of 2011 and it raises the growth forecast for 2010 to 3.7% from 2.9%. On another hand, it lowered the 2011 forecast to 3.1% from 3.5%.
The door is now open for a rate hike by 25bps or 50bps as soon as June.
A few downside factors are also mentioned in the statement: "At the same time, the persistent strength of the Canadian dollar, Canada's poor relative productivity performance, and the low absolute level of U.S. demand will continue to act as significant drags on economic activity in Canada,
The USD/CAD slipped below parity shortly after the BOC statement in a 1.2% down move. The pair dropped down as low as .9976 from 1.0100.
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