Canada lifted interest rates for the first time in nearly seven years overnight as the country’s central bank joined the US Federal Reserve in leading a monetary policy shift across major industrialised countries in response to better global economic growth.
But after a week or more of speculation, the actual decision left global markets unmoved.
Instead the first of two days of testimony from the Fed chair, Janet Yellen did the job, calmed markets (because investors misread her comments) and helped push the Dow to a new record close.
In fact the Dow reached fresh intraday and closing highs, climbing 0.6% to close at 21,532.14, while the S&P 500 ended the day 0.7% higher at 2,443.25 and the Nasdaq Composite added 1.1% to end the day at 6,261,17.
Gold and oil ended higher this morning in New York. Overnight trading on the ASX 200 future market suggests there will be a gain of 26 points when the market opens for trading this morning – half the 55 point fall yesterday.
Media reports and commentary from analysts claimed that Federal Reserve chair Yellen struck a dovish note during her semi-annual testimony to Congress, but harder heads said she did nothing more than repeat the tenor of her press conference after the last Fed meeting that saw rates lifted.
The smarter analysts said the Fed chair was consistent with her remarks following the June meeting and that she remains a firm believer in the so-called Phillips Curve, which argues that falling unemployment, will lift prices and wages – that is despite there being no sign of ay boost to inflation or wages from the long recovery in America’s jobs market.
Ms Yellen regards the low wage growth low inflation scenario at the moment is ’transitory’ but many analysts took her remarks overnight as suggesting the Fed will take a more gradual approach to lifting rates. The next rate rise is pencilled in for December this year by analysts.
The move by the Bank of Canada to lift its key rate by 0.25% to 0.75% had been forecast after the bank’s governor Stephen Poloz had primed the market for a possible rate cut in comments in the past month.
But while a lot of analysts had pointed to the looming Canadian rate increase as a sign of the taper tantrum’s pressures on Australia’s Reserve Bank, the actual decision had no impact. The Aussie dollar rose to close to 76.80 US cents.
The Bank of Canada’s increase is the first by a G10 central bank outside the Fed since the Reserve Bank of New Zealand raised rates three years ago. That was a mistake. The RBNZ quickly reversed that rise and slashed rates to the current all time low of 1.75% for the Official Cash Rate.
