The Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate surged higher later on Wednesday after the Bank of Canada shocked the markets by slashing its base interest rate for the first time since 2010 in an attempt to counter the negative economic effects of falling oil prices.
“The oil price shock increases both downside risks to the inflation profile and financial stability risks, the Bank’s policy action is intended to provide insurance against these risks,” the bank said in a statement.
The bank cut rates from 1% to 0.75% bringing an end to the longest run of unchanged rates since the 1950’s.
Earlier the Pound Sterling to Canadian Dollar (GBP/CAD) exchange rate softened on Wednesday as Bank of England policy meeting minutes increased speculation that an interest rate hike is unlikely until 2016.
Sterling weakened against all of its major peers after the BoE minutes showed that policy makers voted unanimously to leave interest rates on hold in January as Martin Weale and Ian McCafferty dropped their calls for a rise. The sharp fall in inflation because of tumbling oil prices was the main factor for their decision.
‘The fall in near-term inflation might become more persistent if it lowered inflation expectations, pay and other cost growth in a way that became self-perpetuating,’ said the minutes from the January policy meeting.
The Pounds losses are expected to be short-lived as separate data showed that UK unemployment fell more than economist forecast in the three months through November and that wage growth increased at its fastest pace since 2012.
Oil Supports ‘Loonie’
Oil prices inched above the $48 per barrel level after consolidating the steep falls recorded in the previous session. Prices are expected to remain under pressure however as traders said that an oversupply in the global markets is likely to continue.
‘The market is consolidating between $45 and $50 and will at some point break to the downside. It’s not going to be until the second half of the year until we see evidence of production being cut by these low prices,’ said Christopher Bellew, a senior oil broker at Jefferies.
Pound Sterling to Canadian Dollar Exchange Rate Forecast
As the session progresses, the Canadian Dollar is expected to come under pressure as economists turn their attention to the upcoming Bank of Canada interest rate decision. The bank is widely expected to leave rates unchanged at 1% but there are some traders forecasting that it could take the markets by surprise and announce a rate cut.
The Bank is also set to release its latest growth forecast for the Canadian economy. That report is likely to disappoint as weak oil prices continue to have a negative impact.
