Canadian Economic “Vulnerability” Will Stop Rates From Rising With US: Desjardins

Canada is preparing to tighten interest rates with the US, but it will encounter some hurdles. That’s the take from Jimmy Jean, Chief Economist at Desjardins. In a note to clients today, the economist said he expects Canada to start rate hikes with the US. However, the country won’t be able to keep up as economic vulnerabilities surface. Canada is forecast to see rates rising about a fifth slower than the US over the next year.

The Bank of Canada Is Forecast To Hike Rates 4 Times In 2022

The Bank of Canada (BoC) didn’t hike rates last month, but they’re widely expected to next month. The institution sees the first 25 basis point (bp) hike in March 2022, with another three to follow this year. That would put the overnight rate at 1.25% by year-end, much higher than the current level. It won’t be as high as pre-2020, but the debt loads will be very different.

A New Monetary Tightening Cycle Is Dawning In The United States and Canada

Source: Datastream; Desjardins, Economic Studies. 

The US Federal Reserve Is Forecast To Hike Rates 5 Times In 2022

According to the forecast, Americans will be more aggressive with interest rate hikes. Desjardins expects the Federal Reserve will hike rates five times this year. That would put the US 25 bps higher than Canada, likely resulting in some weakness for the loonie. The US has much higher inflation, which can support higher interest rates. More importantly, the US economy is expected to grow faster and be able to support higher rates.

Canada’s Vulnerable Economy Will Prevent Rates From Rising Faster

Canada might start off keeping pace with the US for rate hikes, but it’s dealing with a different economy. Highly indebted households and a housing-dependent economy will limit growth. “[The Bank of Canada] will have to take into account the increased vulnerability of the Canadian economy, including a housing market that is more sensitive to rate hikes, after two years of skyrocketing prices,” said Jean.

Canadian debt problems began before the pandemic and went on steroids once it hit. Experts like the IMF warned that household debt would turn into a problem in the event of shock. Now the country is trying to deal with shock and even higher debt loads. Canada handled the downturn with minimal issues, but it may encounter hurdles exiting it and keeping up with its peers.

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  • balgarnie 10 months ago

    “Canada handled the downturn with minimal issues, but it may encounter hurdles exiting it and keeping up with its peers.”

    If one excludes the housing catastrophe.

    • Van YIMBY 10 months ago

      As a not so wise politician once said, most people are happy with home prices rising this fast and they would be upset if home price fell even 10% from current levels.

  • David Chan 10 months ago

    Canada doesn’t have the global reserve currency. Think about the last recession, when CAD was at par with USD. Now it’s at the same as no recession. If oil prices drop, look out below…

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