Tuesday, June 1, 2010

Bank of Canada raises interest rate, and once again, Europe causes markets to close lower

The Bank of Canada raised its benchmark overnight rate by 0.25%, as expected, resulting in a rate of 0.5%. With this move, Canada has become the first country in the G7 to raise interest rates after the financial crisis. In fact, this move is a testimony of Canada's relatively strong economy compared with the rest of the world, after its GDP grew by consecutive quarters of 4.9% and 6.1%.

The TSX closed down 191.02 points or 1.62% to end at 11,571.97 points today. While stock markets usually fall as a result of higher interest rates, the rate hike is not the cause today, since the move was widely expected.

Instead, Mark Carney's cautious statement about the condition in Europe seems to be part of the cause. The Bank of Canada governor warned that the global recovery is uneven, with emerging economies recovering sharply, while others are not. Thus, the Bank of Canada conveyed that there might not be a rapid series of rate hikes, saying “given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

The other cause of the TSX's downward movement is the fall in the price of oil, which fell almost 2 percent to below $73 a barrel, pushing down shares of oil companies. The fall in oil price, in turn, was caused by growth fears. This brings us once again to the single most important factor to stock markets for the next few weeks – Europe (and especially Spain). Fears of slow growth for the region dictated the downward movement of the TSX and the Dow today.

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