“Conditional Commitment” shifted economic outlook, no assurance of settled trade

Yesterday's announcement that the lending rate would remain at a record low of 0.25% contained a phrase about a “conditional commitment” to keep it unchanged until July unless the inflation outlook shifted. The bank said inflation will be “slightly higher” than its 2% target over the next year, and increased its 2010 economic growth forecast to 3.7% from 2.9%.

“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 central bank, led by Governor Mark Carney, said. “The extent and timing will depend on the outlook for economic activity and inflation.”

The Canadian Dollar jumped 1.6% against its American counterpart as the new language suggested the bank may increase rates as early as its next announcement on June 1. The Canadian Dollar closed the day trading above parity with the US Dollar at CAD 0.99792.

USD/CAD Chart

In Australia concern that the current mining boom will stoke inflation was a key reason the central bank raised borrowing costs toward “more normal levels” two weeks ago according to the minutes of the meeting of the Monetary Policy Committee released yesterday.

Governor Glenn Stevens has led the world in raising borrowing costs, after raising the overnight cash rate this month by a quarter percentage point to 4.25%, the fifth move in six meetings. The bank is signaling further increases in borrowing costs as the economy’s expansion accelerates, spurred by this year’s 50% jump in the spot price for iron ore.

GDP grew in the fourth quarter at the fastest pace in almost two years, rising 0.9% from the previous three months. The economy expanded 2.7% from a year earlier.

“On the question of timing, the fact that the prospective rise in the terms of trade was now likely to be noticeably stronger than had been expected was a factor suggesting that it might be prudent not to delay adjustment,” central bank officials said in the minutes. By contrast, central banks in Europe, the UK and the US have left borrowing costs close to or at record lows.

Yesterday in the forex online market the Australian Dollar saw a drop against its American counterpart for the third day, it fell 0.64% to close at AUD 0.93116.

In the commodities market Gold prices steadied above two-week lows yesterday but investors remained cautious about potential fallout from fraud charges against Goldman Sachs and the currency volatility on Greece's debt problems. On Monday, investors took the opportunity to cash in profits on gold, which has rallied about $100 since early February, pushing it down to a two-week low.