Economists and experts who monitor the U.S. central bank are predicting that the Federal Reserve is going to raise interest rates this Wednesday. If and when that happens, it will trigger something that hasn’t happened since 2007 – Canada will have a lower central bank than the U.S.
A comparison of the Canadian and U.S economy
Canada is inextricably linked to the U.S., so anything that happens there is bound to have spillover effects here.
In the U.S., the economy was expanding at a 3.2 per cent annual pace in the third quarter, it’s fastest rate in two years. The job market is also booming, with the jobless rate dropping to a nine-year low of 4.6 per cent.
In Canada, meanwhile, the picture isn’t looking quite as rosy. While doing slightly better than 2015’s low bar, the economy is forecast to only expand by 1.1 per cent this year, and the vast majority of new jobs being created are part-time.
With numbers like that, it’s not hard to see why the two central banks are leaning in opposite directions.
Bank of Canada Interest Rate
In its latest policy statement, the Bank of Canada did the expected and kept its rate right where it has been for more than a year, at 0.5 per cent. While keeping its toes planted firmly on the sidelines, the bank noted “a significant amount of economic slack in Canada, in contrast to the United States.”
Impact on borrowers
When the central bank’s rate moves, it has an effect on variable-rate mortgages. But more Canadians have fixed-rate mortgages, which are linked to what’s happening in the bond market, which responds to market forces.
That means, somewhat counterintuitively, that Canadian borrowers renewing the terms of their loans may soon be asked to pay more, even as the central bank in this country is contemplating making borrowing cheaper.
The Canadian Dollar
Mortgage rates won’t be the only thing to feel the effect of a U.S. rate change, expected to be announced this week. If the Fed hikes rates while the Bank of Canada keeps its rate low, that’s a recipe for a weaker Canadian dollar.
“At a minimum, the loonie is likely to remain close to its current level around 75 cents US,” TD economist Beata Caranci said.
The Fed has been signaling – loud and clear- that it’s ready to start inching rates higher, pointing in recent months to a strengthening U.S. labour market and inflation that is closer to its target rate of two per cent. The only question that remains is how quickly it will move rates upward in the coming year and how high it will allow inflation to rise.
It’s treading carefully because every move it makes has a ripple effect on markets both in the U.S. and internationally. A rising U.S. dollar could hurt other currencies and move bond markets, affecting borrowing around the world.
At Client First Mortgage Solutions our Mortgage Advisors have a combined mortgage industry knowledge of over 18 years. We are informed about market changes on an international level and are always looking for ways to help keep you informed about current mortgage rates. Access our website for free downloadable resources, or contact us with any of your mortgage related questions. Our mortgage professionals will assist you in finding the right options that work for you, to help you achieve your financial goals and help you make the best decision.
http://www.cbc.ca/news/business/monetary-policy-divergence-1.3887829
