Bank of Canada Will Get More Room To Hike Rates With US Fed Turning Hawkish: RBC

Canada’s largest bank now sees the US raising interest rates, and it’s a big positive for Canadian rate hikes. RBC senior economist Josh Nye said the bank sees the US hiking rates by next year. The hike will allow the Bank of Canada (BoC) to raise rates without a significant appreciation of the loonie. This was a previous concern, which could have affected the country’s export economy. Now that the US is considering a hike, it makes Canada’s even more likely.

Bank of Canada To Taper QE Further, and Hike Interest Rates Twice By Next Year

Canada’s largest bank sees the BoC tapering QE asset purchases further this month. Purchases are expected to fall to $2 billion per week by month-end, down from the current $3 billion. By itself, this should help firm borrowing costs on its own, as excess liquidity is removed.

In addition, RBC sees the BoC hiking the overnight rate twice in the second half of next year. With the US accelerating its own hike, this provides even more reason for Canada to raise rates. “The [US] Fed’s shift is seen as giving more room for the BoC to raise rates without triggering significant C$ appreciation,” he said.  

Canada Hiking Interest Rates Previously Resulted In Concerns Over The Impact To Exports

Part of the concern with the BoC raising rates had been a loonie that’s too strong. Canada depends on a relatively weak currency to make exports more attractive. Additionally, it also gives foreign firms cheap labor, especially in the tech industry.

If Canada raises rates without the US, it may see appreciation against the dollar. A higher loonie would be a drag on exports, and potentially near-sourcing. Concerns a hike would be counterproductive were popping up. That should be less of a concern now, as the US gets ready to tighten the monetary system.

US Federal Reserve Forecast To Hike Rates By Next Year

The US Federal Reserve revised 2021 growth and inflation forecasts higher. RBC notes the recent shift in tone in the central bank’s meeting, went from “dovish” to “hawkish.” That is, they were in support of low-for-long rates, due to a weak economy. Now they are expressing concerns of rates being too low, with the economy in a much better place now.

“The most significant development was a change in the plot with a majority of [FOMC] participants now expecting at least two rate hikes will be appropriate by the end of 2023,” said Nye. 

The economist sees the first rate hike happening before that though. RBC moved the Fed hike forecast to the fourth quarter of next year, ahead of general expectations. They’re now watching for tapering of asset purchases, which they see happening by year-end. 

A hike from the US would allow the BoC to hike, with much less pressure on currency exchange. If Canada hiked alone, it would slow credit growth and inflation, but may also impact exports. If both countries do it at the same time, the loonie’s increase against the US dollar would be minimal. That gives the BoC a little more room to make the next increase more comfortable… or hike even more if needed.

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  • Trader Jim 3 years ago

    I think BD is the only media making an important point here. Interest rates don’t need to increase for credit to tighten. When they stop providing excess liquidity, asset prices slow in growth.

    • Dar Robbins 3 years ago

      I don’t think Tiff or any other central banker has the guts to take their foot off the gas pedal.
      Slamming the brakes is out of the question IMHO. That would only lead to a higher Cando and crash our precious real-estate market.

      • Smaug 3 years ago

        Inflation might force them to take their foot off the gas. Also, inflation will prevent them from doing “yield curve management”, where they suppress the long bond yields. Buying more long bonds = printing more money = looser credit conditions, which they can’t get away with indefinitely when inflation is headed higher.

  • Dar Robbins 3 years ago

    Don’t care what central bankers say. Bla.bla, bla
    I only care about what they do.

    If I had a choice in believing a central banker or a used car salesmen, I’d have more confidence in the latter.

  • umi1 3 years ago

    If they raise rates with every home sold during the pandemic with rates at all time lows, isnt that going to be a realestate armageddon? Hard to think this would happen any time soon

    • Dar Robbins 3 years ago

      Yep. Given how Canadian Real Estate represents something like 10% of GDP, combined with very high unemployment, I can’t see how the BoC can tighten in any significant way to truncate inflation. They may do a 25 bp to save face and be done with it. Well see. I’ll be grabbing my popcorn as this should be entertaining.

  • cto 3 years ago

    Since 2008’s “emergency interest rates”, this statement has been thrown out there by many, incl the Fed and their many central bank followers and believers.
    “these are only emergency interest rates,…expect them to go up asap!!!”
    Ten years later?… “um…we’re going to try now (2018)….Now?(2019),…nope not yet…maybe later”…
    Holly cow, have these guys (CBs) got any creds left???
    Maybe, just maybe they’ll go 1/4 point a year….

    • Dar Robbins 3 years ago

      I’m now taking my forward guidance from Sal at the Used Car Emporium.

  • Ado 3 years ago

    The U.S. unemployment rate is a lot lower than Canada’s too – approx 5% vs 9%. If they US reaches peak employment this year, which is likely, they will need to raise rates in inflation stays above 2%. Canada will need to raise rates or risk driving the dollar into oblivion. If they do raise rates, Canada’s unemployment rate is going higher. The funny thing is many home buyers mistakenly only look at what rates mean to servicing their debt, but ignore what it means for employers servicing theirs. Also, higher home prices have rekindled the brain drain. Triple whammy for the housing market. Good times coming for the Canadian economy.

    • Anthony 3 years ago

      Your assumptions are incorrect. Jerome Powell said no interest rate increase until 2023. Where are you getting this info saying otherwise? Sources please. Painfully obvious the author is rooting for rate hikes.

      • LT 3 years ago

        No, they said they wouldn’t hike the overnight rate until 2023, though the notes said they may have to consider it earlier.

        They definitely implied they would consider a taper, which also boosts rates, just not the overnight rate.

        Regardless of whether the author “rooting” for rates hikes, this is RBC moving their forecast ahead to expect a rate hike one year earlier than thought. RBC isn’t cheering on a rate hike at a foreign bank. That’s their assessment for planning their business.

  • Andrew Miller 3 years ago

    I don’t think rates are going anywhere despite what the Fed and analysts are saying. If the Fed raises, the US government will become insolvent because of all the debt that’s been racked up. The only real option is to inflate the debt away.

    • Holton 3 years ago

      Finally, someone who understands the real world of economics.

      Most of these people hoping for a real estate crash have no idea what happened in Asia.

    • Snwestern 3 years ago

      I find statements such as “the only real option is to inflate the debt away” to be curiously circular logic. Inflate the debt away by continuing to add more debt? The longer asset purchases by BoC go on, it is adding more debt.

      The follow up response from proponents typically is along the lines of “internally owned debt doesn’t matter”. Well, if this is true then why worry about inflating the debt away in the first place!

      • Gerald Haw 3 years ago

        Most of the “inflate the debt away” doesn’t understand that also raises the government operating costs, since they price in CPI-based employment escalations. They aren’t inflating the debt away, they’re inflating their operating costs.

        • Rob 3 years ago

          Yes Sir Geraldine. With our nation’s new 1.13T debt, every .025 increase in our interest rates add approximately 2.6B in interest payments.

          Welcome to JT’S world I guess.

          • Rob 3 years ago

            Not sure why my computer wanted to feminine your name by adding 3 letters……Apologies!

    • Gerald Haw 3 years ago

      Not even close to true. The rate doesn’t impact old debt, it impacts new liabilities. There’s a reason they sold $2 trillion in debt for the next 4 years in such a short window.

  • Pepp 3 years ago

    Well, mortgage from last 5 years are basically stress tested for rate hikes. If you think that will force people to sell, think again.

    • Jason Chau 3 years ago

      It’s always fun to watch someone not understand what they read, and assume the other person is wrong… when that’s not what they said.

      Lowering rates pulls demand forward, and creates higher sales. Raising rates pushes demand further and lowers sales. The weakened demand from the lull is what brings prices down.

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