Bank of Canada Lowers Key Interest Rate

Pointing to the rapid rise in value of its currency, the Bank of Canada cut its key overnight interest rate to 2.5% on Tuesday, news reports said.

The cut was expected by analysts, according to the Canadian Press, who cited the rapid appreciation of the Canadian dollar, or loonie, against the U.S. dollar. Canadian currency is sometimes referred to as the loonie because the country’s $1 coin features the loon, the national bird.

Reuters said that in the past 12 months, the Canadian dollar has risen in value to 77% of the U.S. dollar from 64% of the greenback.

Much of the loonie’s growth comes from loss of confidence in the U.S. dollar, CP reported, but some comes from the wide gap in the policy interest rates of the two countries. The overnight lending rate in the U.S. is 1%, CP said.

The overnight rate, the benchmark for other interest rates throughout Canada, remains half a percentage point above its multi-year low of 2%, in force in early 2002, Reuters said.

Canada is the largest U.S. trading partner and a member of the North American Free Trade Agreement, so if the rate cut provides a boost to the Canadian economy, the United States could be a beneficiary.