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The Bank of Canada raised its overnight rate by twenty-five basis points to 2.50 per cent today, despite opting to lower its growth forecast for 2005 from 3.50 per cent to slightly less than 3.0 per cent, according to a report from BMO Financial Group's Economics Department.

Today's announcement from the Bank of Canada stated that its growth revision was prompted by "the effects of higher oil prices and the past appreciation of the Canadian dollar." In the past, the central bank has tended to view it as a wash with the negative impact on oil consumers and exporters to the U.S. being offset by the positive impact on oil producers. As well, rising commodity prices, both energy and non-energy, would generally require the Canadian dollar to appreciate.

"The revision suggests a shift of thinking about higher oil prices," said Paul Ferley, Assistant Chief Economist, BMO Financial Group. "The comments by the Bank suggest an element of appreciation is going beyond that necessitated by rising commodity prices."

Today's announcement has reinforced market expectations that the overnight rate will be raised in December and possibly again early in 2005. "But if oil prices and the Canadian dollar continue to rise, the central bank will likely lower further its near-term growth outlook which, in turn, would likely prompt a pause in the tightening cycle," suggested Ferley.

The full report is available at www.bmo.com/economic.

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