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Can Canada Go Its Own Way on Rates?

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”Markets can remain irrational longer than you can remain solvent” ~ John Maynard Keynes

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. 

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The Bank of Canada is attempting to balance the higher debt levels for Canadian households with the need to control inflation. Rates are now 0.5% below the US, but an even larger gap persisted throughout 2019 without impacting the currency. 


Pour plus d’informations, veuillez contacter:

Adam Jacobs

Head of Research | Canada

Toronto Downtown

Colliers Canada's head of research, leading a cross-country team of 20 mapping, analytics and research professionals. Formerly head of Canada research at Cushman Wakefield and Director of Analytics at Oxford Properties. Featured in mainstream publications such as the Toronto Star, industry publications and podcasts. Specializing in the big picture and the fundamentals driving real estate - demographics, the macro environment and the global economy. 

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