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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