2 Reasons Why the Loonie's Outlook Has Changed

Looks like the tides are about to change for the Loonie, folks!

It's no secret that for the past couple of months, interest rate hike prospects from the Bank of Canada (BOC) have limited the Canadian dollar's losses against its major counterparts. But when the BOC combined its interest rate statement with its monetary policy report yesterday, the Loonie traders got more than they bargained for. Here are a couple of things that we have learned:

The BOC is expecting lower economic growth

You read it right! Instead of giving the market players its usual optimistic prospects, the BOC actually cut its economic growth forecasts for 2012 and 2013.

The bank's policymakers now expect their economy to grow by 2% in 2013, down from its 2.3% forecast in October. Q4 2012's growth was also cut from 2.5% to 1%. Lastly, growth in 2012 is expected to come in at 1.9% instead of 2.2%. Talk about painting a grim picture!

Even the International Monetary Fund (IMF) isn't too excited about Canada. In its World Economic Outlook report yesterday, the IMF printed that it's only expecting the Canadian economy to grow by 1.8% in 2012 and not 2% as it had previously reported.

The BOC cited that unexpectedly low business investment and weak exports contributed to a sharper-than-expected slowdown in the second half of 2012. 2013 isn't looking too good either, as the overall slowdown in global growth as well as a new trend of Canadians holding back on their credit spending pose threats to the country's economic activities.

The BOC is delaying its interest rate hikes

Although nobody was surprised that the BOC kept rates unchanged at 1.00%, jaws dropped when Carney mentioned that interest rate hikes are "less imminent" this time around. That's a pretty huge turnaround from his previous hawkish statements when he talked about the increasing need to tighten monetary policy!

Why the change in tone? Apparently, central bank officials are getting concerned about the muted inflation outlook for Canada. On top of that, the lack of steam in Canadian housing market's rebound also made policymakers think twice about withdrawing stimulus. According to Carney, the strong improvement in the jobs sector probably won't be enough to make up for these economic risks.

With that, the BOC might be in no rush to hike interest rates until the middle of 2014. This means that businesses and consumers could enjoy more than a year's worth of low borrowing rates, which could be good for spending, investment, and overall economic growth.

So while the sky isn't exactly falling for the Canadian economy, it isn't about to pop up rainbows and unicorns either. At the very least, we probably won't see any BOC interest rate hikes this year. But what do you think? Are the developments above enough to change the long-term outlook for the Loonie?