Canada's six biggest banks accused of rigging rate to boost profits

Faith Castro
January 18, 2018

A class-action lawsuit filed in a USA court alleges six Canadian banks and three others conspired to increase the profitability of their derivatives trading business by manipulating an interest rate benchmark for about seven years.

The Canadian dollar strengthened to a almost one-week high against its US counterpart on Monday as the greenback broadly fell and investors braced for a potential interest rate increase by the Bank of Canada this week.

That part of the puzzle is likely to be solved today as we have the BOC rate announcement as well as the statement scheduled to be released today. There was a good debate around that.

"Of course, the big cloud over the forecast as well as our discussion is, well, NAFTA", Poloz said.

Governing council, the bank added, would remain cautious when considering future hikes by assessing incoming data such as the economy's sensitivity to the higher borrowing rates.

Oren Klachkin, senior economist at Oxford Economics says the ongoing uncertainty surrounding NAFTA alone won't make the Bank of Canada cut rates.

For a self-professed data-driven central bank, this rate hike was an easy call.

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Canada did so well in 2017 that it left little slack in labour markets or capacity in its wake, easily justifying a quarter-point hike today. "That should pose some questions to all those rate hikes priced into the market", said Adam Cole, chief currency strategist at RBC Capital Markets in London.

'Recent data have been strong, inflation is close to target and the economy is operating roughly at capacity, however uncertainty about the future of NAFTA is weighing increasingly on the outlook'.

The trade uncertainty is expected to reduce the level of investment by about 2 percent by the end of 2019, the bank said in its Monetary Policy Report.

The Central Bank confirmed on Wednesday that the cost of money is going up, citing stronger employment and GDP growth in 2017, as well as increased activity in residential investment and consumption by consumers.

"Overall, this was a dovish statement relative to the minimum degree of optimism needed to justify a rate hike today, and could put some downward pressure on 2 year yields and the value of the C$".

"Based on the economic environment alone, the case for higher interest rates in Canada is airtight", Scotiabank economists wrote in a January 12 research note. The Bank expects CPI inflation to fluctuate in the months ahead as various temporary factors (including gasoline and electricity prices) unwind. The economy is still heavily dependent on housing and debt which, we still firmly believe, will eventually upend the economy and prompt a reversal in monetary policy before year-end.

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