rates
NEIGHBOURHOOD WATCH The Bank of Canada and Federal Reserve often have a similar policy interest rate and a major reason why is if interest rates diverge too much between Canada and the US, capital will move in greater numbers to the country with higher interest rates and away from the country with lower rates. This will push the currency value of the country with lower rates down and increase the cost of imports, which is essentially importing inflation. For that reason, neither nation wants to have rates too much lower than the other. The Bank of Canada does have some wiggle room though as it navigates an economy that has cooled more quickly than in the US,
and there are some key historical differences that can help inform today. The biggest difference is that the Bank of Canada has more leverage than the Federal Reserve, because most Americans choose 30 year mortgages while most Canadians choose five years. This means that every increase (or decrease) in interest rates in Canada has a larger effect than in the US. As such, US rates generally peak higher than in Canada as they have in this cycle, and end up cutting to a lower level in the US as well. The spread between the two nations has rarely been above 100 basis points over the past 25 years, so don’t expect the Bank of Canada to cut rates very much until the Federal is ready to cut as well.
WHY THE US ECONOMY MATTERS: PART II
7.0%
6.0%
5.33% 5.00%
5.0%
4.0%
3.0%
2.0%
1.0%
0%
-1.0%
-2.0%
BOC POLICY INTEREST RATE
FEDERAL FUNDS EFFECTIVE RATE
DIFFERENCE
SOURCE: STATISTICS CANADA. TABLE 10-10-0122-01, US FEDERAL RESERVE DATA: BANK OF CANADA POLICY RATE, US FEDERAL FUNDS EFFECTIVE RATE, MONTHLY
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