Why the U.S. Fed rate hold is good news for the loonie — and the Bank of Canada
Global News
The U.S. Federal Reserve held interest rates steady on Wednesday. With the Bank of Canada hiking again, here's what that could mean for inflation and rates north of the border.
The U.S. Federal Reserve’s decision to hold interest rates steady as the Bank of Canada reignites its rate-hike cycle could be good news for the Canadian dollar and the inflation fight north of the border, according to a BMO economist.
Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, tells Global News that even temporarily divergent rate paths from the central banks would be a boon for the loonie, which in turn could limit how restrictive the Bank of Canada needs its policy rate to be.
The U.S. Fed’s decision to leave rates unchanged on Wednesday — its first pause after 10 consecutive hikes — comes a week after the Bank of Canada came off the sidelines to increase rates by another quarter percentage point.
Some economists and big banks, including BMO, are calling for another rate hike from the Bank of Canada in an upcoming decision in July. Market odds are leaning that way as well, Reitzes notes.
The Fed also signalled two small rate hikes could be in the cards for the rest of the year following its pause in June.
Central banks on both sides of the border are “almost entirely” dependent on the kinds of economic data they see in their inflation and labour market reports over the next few months, Reitzes says.
TD Bank senior economist James Orlando said in a note to clients on Wednesday that if the U.S. economy slows according to TD’s forecasts in the latter half of the year, it could be enough to keep the Fed on pause indefinitely — despite the suggestion of additional hikes.
If the Bank of Canada delivers on expectations and hikes rates in back-to-back decisions while the U.S. Fed moves off to the sidelines, Reitzes says the differential between those two rates will be good news for the loonie — and by extension, Canada’s inflation fight.
