OTTAWA, Ont. – The Bank of Canada’s move to cut its key overnight interest rate to 2.5 per cent in January was hailed as a step in the right direction by Canada’s transborder trucking industry.
But not quite the step needed to stem the rising value of the loonie vis-a-vis the American dollar, said industry analysts.
“I had already said a rate reduction of anything less than 50 basis points would likely not have any beneficial impact in terms of lowering the value of the Canadian dollar. Indeed, the 25 basis point rate cut (in January) proved my point, as the dollar actually increased in value on the news,” said CTA CEO David Bradley.
“To be fair, while the appreciation does suggest that 25 points was inadequate, it also reflects the fact that the increase in the value of the Canadian dollar has more to do with the weakness of the U.S. currency than it does the strength in the Canadian currency.”
Indeed, much of the loonie’s growth came from loss of confidence in the U.S. dollar, according to economists, the Canadian Press reported.
But it is also generally agreed the wide gap in the policy interest rates of the two countries has also been a factor. The overnight lending rate in the U.S. is one per cent.
In Canada, the overnight rate, the benchmark for other interest rates throughout Canada, remains half a percentage point above its multi-year low of two per cent, in force in early 2002.
“It’s definitely a step in the right direction,” said CTA senior vice-president Graham Cooper. “But our hope is that the bank will take further steps if necessary.”
The loonie’s rapid rise in value against the American dollar is pressing issue for carriers, many of whom are paid in U.S. dollars and rely substantially on transborder shipping.
Cooper pointed out Canada/U.S. trade (export and import) accounts for $CAN564 billion, and that of that amount, exports account for $CAN350 billion of that total.
Canada’s trade with the U.S. accounts for approximately 1/3 of the Canadian economy overall, he added.
That’s why the overnight rate cut came as no surprise to analysts.
Over the past year, the Canadian dollar had risen in value to 77 per cent of the U.S. dollar from 64 per cent.