We’ve received some questions at Research HQ about the different approaches of the Bank of Canada vs the US Federal Reserve. While Canada has paused rate hikes since January, the US continued this month, raising another 0.25% (although this was less than initially thought, due to the surprise US bank failures this month).
Generally the Bank of Canada tracks the Fed closely... but Canadian rates also peak below the US rates in each tightening cycle. As discussed, Canada has higher levels of household debt than the US. One interesting argument, put forth in this Reuters article, is rate hikes have a stronger effect in Canada because of that indebtedness. An odd silver lining: since we’re so leveraged, rate increases have a bigger impact?
OK, let’s stop hiking rates and let the US take all the pain! Well hold on... interest rates are tied together because of currencies. We need to buy coffee and bananas (they don’t grow well above the 49th parallel) and a weaker CAD means we pay more, prices go up, and we’re back to where we started with inflation.
But so far things seem to be holding up. The Bank of Canada is ”having their cake and eating it too,” where they paused rate hikes but the currency doesn’t seem to be suffering. Even if you zoom out five years, the currency hasn’t really moved. And Canada has maintained a lower rate for years at a time, as recently as 2018-2019.