90 seconds at 9am: Bank of Canada hikes rates; Euro drops again; Dow down

Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with BNZ, including news the Bank of Canada has increased its official cash rate from 0.25% to 0.5%. 

Canada is the first G7 country to tighten monetary policy. The Bank of Canada argued that parts of the world, including Canada, were returning to growth, although it warned that Europe's financial problems could upset the outlook. US manufacturing data overnight was positive, although growth in China's factory output was more subdued.

The Reserve Bank of Australia left its Official Cash Rate on hold at 4.5% yesterday, although it had increased the rate 7 times since October and many homeowners now are at the 'pain threshold' variable rate of 7.5%, slowing the economy down.

The Reserve Bank here is widely expected to hike the OCR from 2.5% in the next two months, pushing up term deposit and mortgage rates, although the OCR is not expected to be raised as far or as fast as in previous recoveries because banks are less able to lend quickly and are being forced by shareholders and regulators to fund their lending locally, rather than from 'hot' money markets.

This means floating mortgage rates are likely to remain less than fixed rates for some time, given fixed rates are funded more from these 'hot' international markets. Term deposit rates will continue to rise and be significantly higher than the Official Cash Rate as banks compete hard for funds.

Meanwhile, the euro fell to a fresh 4 year low on renewed fears about its sovereign debt crisis, although it rebounded slightly in late trade. The Dow was down 1% in late trade on renewed Mideast tensions and a 15% drop in BP's share price on its failed 'Top Kill' attempt to plug its leaking oil well, extending its drop in value to 40% or US$70 billion since Mid-April.