The U.S. Federal Reserve hiked interest rates for the first time in three years on Wednesday, and several economists say this could add pressure on the Bank of Canada to raise borrowing costs for Canadians sooner than later.
Canadian borrowing rates aren’t directly tied to changes made by the U.S. Fed, but there are some ripple effects, including changes to the loonie, which could influence future changes.
Derek Holt, economist and vice president at the Bank of Nova Scotia, said in a statement on Wednesday that he would be surprised if the U.S. rate hike doesn’t “add one more ingredient to pave the way” for Bank of Canada Governor Tiff Macklem to begin hiking soon.
Central banks, like the Fed and the Bank of Canada, aim to maintain the balance of their economies by ensuring inflation stays within a sustainable range (usually between one and three per cent), while also keeping borrowing rates low enough to allow the economy to grow.
The main way they strike that balance is by adjusting benchmark interest rates, and Canadians and businesses alike could wind up paying more to borrow money and take out mortgages and other loans if the Bank of Canada hikes its key rate.
Canada’s consumer inflation has been hovering around three per cent through July and August, while U.S. inflation was last reported at 3.4 per cent.
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Bank of Canada interest rate hike ahead?
One of the main reasons the Bank of Canada could move to raise interest rates is if inflation gets too high, and a weaker Canadian dollar in the face of a stronger U.S. dollar can risk inflation rising in Canada. That’s because the currency diversion makes imported goods more expensive in Canada.
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When the Fed’s rate announcement happened on Wednesday afternoon, the U.S. dollar increased in value, which sent the Canadian dollar’s equivalent value down by more than a quarter of a cent almost instantly.
Doug Porter, chief economist at the Bank of Montreal, says although that’s a relatively small drop, if the trend continues, then the Bank of Canada may lean more towards raising rates, like the Fed did.
“Were the Canadian dollar to soften a little bit more, it would put a bit of pressure on the Bank of Canada to possibly follow the Fed. But I don’t think we’re close to being there yet.”
The Fed’s new benchmark sits at minimum 3.75 per cent, while the Bank of Canada’s is 2.25 per cent. That divergence in key lending rates could also add pressure to the Canadian dollar because of the difference in borrowing costs, especially for businesses.
“They’re more than a percentage point and a half higher, so we’re starting off at much, much lower rates,” says Porter.
“Perhaps those really low interest rates in Canada are not sustainable for long if inflation stays at three per cent.”
But the Fed’s rate hike could affect Canadian borrowing costs even without a Bank of Canada rate hike, and that’s because of recent bond market jitters.
Bonds yields, or the interest they pay out to owners of those bonds, increases or decreases depending mostly on supply and demand. If there is less confidence in the U.S. government to rein in inflation, then U.S. government bond owners may sell those bonds because of the perceived risk.
U.S. bond yields have been spiking recently, especially since the start of September, and higher interest rates and inflation typically leads to higher bond yields.
“We are seeing slow but steady upward pressure in longer-term interest rates, like say a five-year mortgage rate. They have been rising because of the pressure that we’re seeing on these bond yields.”
Ben, it has a direct impact on variable rates. Which in a sense adds to inflation by hiking rates, people with a variable rate mortgage pay more.
Anonymous is a village idiot
1.
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@Carol
It will stop when the klepto-socialist stop printing money they don’t have and bulldozing into our $1.4 trillion public debt black hole.
Bill, did you know that Alberta’s oil is ideal for refining diesel, bunker oil, and asphalt?
Can you imaging how well positioned Canada would be as an energy superpower today, if Sunny Ways Trudeau had spent the past decade building pipelines east to the refineries in Quebec and New Brunswick, instead of imposing economic stagnation to appease Quebec, the Abbos, and all manner of morally and cognitively impaired “free” stuff voters?
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Interest rates are the price of money. The Fed and other central banks are engaging in price controls. Price controls don’t work, full stop. When will this madness end?
Why are time zones Provincial jurisdiction in this idiot country?
Clownada, the puppet state, has no choice but the do what the US does
Ahh, yes to bring down price inflation. How many interest rate hikes will it take to open the strait of Hormuz, or to end out trade spat with the US?
Dr Benjamin the reliable spell caster changed my life by helping me strike the mega million jackpot, he gave me the mega million jackpot numbers and I won, contact him via email drbenjaminlottospell711 @ gmail. com
Loonie already down a full cent since this happened.
Go Canada Go! So cool to see and hear from Cretien and Mulroney. Elbows up!
Surely the new Alliances we have recently forged can buy Cdns a better rate and multiple Suitors?!
The Bank of Canada rate has very little impact on mortgage or other rates. It’s bond yields-Government of Canada bond yields-that have a much greater impact. Yes, the Bank of Canada rate has a scintilla of impact but it’s really bond yields that rule!