Canada Is Softening Its Rate Hike Position While The US Considers A “Super” Hike

Canada and the US both reported the highest inflation in decades, but they have different takes on tackling it. In recent days, the Bank of Canada (BoC) softened its stance on rate hikes, blaming transitory issues. Meanwhile, the US Federal Reserve has become more aggressive, calling an inflationary shock. Both countries are expected to raise rates in the same month, but don’t expect them to hit the same level. Experts attribute this to Canada’s more vulnerable and interest-sensitive economy.

The Bank of Canada Is Softening Its Rate Hike Stance

Canadian inflation reported the highest inflation in 30-years, but the BoC doesn’t see it sticking. BoC Governor Macklem reiterated his transitory narrative this week in a speech to the Canadian Chamber of Commerce. “The inflation we are experiencing today largely reflects global supply problems, most of which stem from the pandemic,” he said.  

If elevated inflation is due to the supply chain, slowing demand via a rate hike isn’t necessary. “As the pandemic recedes, conditions around the world should normalize, taking pressure off global goods prices,” explained the Governor. 

Many interpret that as meaning the central bank isn’t as keen to hike rates as was previously assumed. They would have to take a slower path as the economy reopens, and capacity improves. Canada’s largest banks have been very vocal about this being the incorrect take. However, the Governor is making the rounds to share his opinion without providing much evidence.

The US Federal Reserve Is Becoming More Aggressive With Its Rate Hike Intentions

Over in the US, inflation hit a 40 year high, and they’re considering a “super” interest rate hike. A full hike is 25 basis points (bps), whereas a super hike would be 50 bps — twice the usual pace.

The central banks sees supply chain issues, but they’ve retired the transitory narrative. Now they largely see an inflationary shock that needs to be slowed via monetary policy. “I’d like to see 100 basis points in the bag by July 1,” said St. Louis President James Bullard in an interview this week. 

Bullard is just one of the Reserve’s members that vote on interest rates. However, Chairman Jerome Powell has said a 50 basis points hike is possible for March. The market is currently pricing the odds at 1 in 3 for a super hike in March. US Federal Reserve leaders have  increasingly expressed this is a monetary policy issue — not one out of their control. 

Earlier this week, Desjardins provided insight that helps explain the two takes. The financial institution is one of the few to forecast fewer rate hikes in Canada than the US. Higher debt loads and an interest sensitive economy means the BoC can’t pursue aggressive rate hikes like the US. It also can’t keep up with the US due to Canada’s lowered neutral rate. In other words, Canada left rates low for so long, the highly indebted country can’t respond in the same way as the US.

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  • Ben 10 months ago

    That’s gonna WRECK the loonie if any of their hikes are double. Good for them, they’re controlling inflation and housing before it turns into another 2008.

    There’s a reason the US is the global reserve currency, and Canada is the currency of choice for money laundering.

    • USA 10 months ago

      Investors here pay all cash in $US, get mortgae in $ Can, transfer back in $ US and invest in US stocks. No many investors want to keep any $ Can or buy any good besides RE in $ Canadian.

  • FlipG 10 months ago

    Workers and savers will suffer while money launderers and gamblers will prosper.

  • Axel McLion 10 months ago

    So we’re going to devalue our currency instead of raising rates, so as to keep the housing bubble from deflating in nominal terms?

  • questions guy 10 months ago

    when has the central bank EVER cared for overleveraged buyers? we’ll sink our economy and add to inflation for what? the financially illiterate

  • Km 10 months ago

    Canada stay very much in step with the Fed or it would destroy our dollar. Don’t expect it to be too far behind all you people who over leveraged on houses you couldn’t actually afford.

    • Daniel Ko 10 months ago

      Canada can’t. The literal point is Canada is too highly indebted to hike with the US.

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