"Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further," - Bank of Canada.

Image © Bank of Canada, Reproduced Under CC Licensing

The Pound to Canadian Dollar exchange rate rallied to a four month high after the Bank of Canada (BoC) raised its cash rate by less than economists and markets had anticipated for October, although it still warned that further increases in interest rates are likely in the months ahead.

Sterling traded up to 1.58 and its highest against the Canadian Dollar since this time in June after the BoC raised its cash rate by 50 basis points to 3.75%.

Many economists had forecast the benchmark would be lifted to 4% while prices in certain parts of the interest rate derivative market suggested ahead of the decision that some investors were also expecting a 0.75% increase to 4%.

"The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy: housing activity has retreated sharply, and spending by households and businesses is softening. Also, the slowdown in international demand is beginning to weigh on exports," it said.

"Economic growth is expected to stall through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy," the bank added in a statement containing its decision.

Above: Pound to Canadian Dollar rate shown at 15-minute intervals alongside USD/CAD. Click image for closer inspection.

Wednesday's interest rate rise was the smallest since April but the October slowdown is not necessarily a prelude to a stoppage as the bank also warned that further increases are likely to be necessary over the coming months.

"Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further," it said.

This was as the BoC cut its forecasts for Canadian GDP growth, which is now expected to come in around 3.25% this year before falling below 1% next year, reflecting downgrades from earlier projections of 3.5% and 1.75% respectively. The 2024 forecast was unchanged at 2%.

Meanwhile, the BoC's inflation forecasts were left largely unchanged with the annual consumer price index inflation rate expected to ease back to 3% by the end of next year before returning to the 2% target by the end of 2024.

"The statement and downgraded growth forecasts within the MPR hint at an economy that is losing momentum maybe a little quicker than previously anticipated," said Andrew Grantham, an economist at CIBC Capital Markets.

Above: Pound to Canadian Dollar rate shown at daily intervals alongside USD/CAD. Click image for closer inspection.