The Federal Reserve’s efforts to step up its fight against inflation will call into question the Bank of Canada’s own ability to limit rate hikes.
In Wednesday’s decision, Fed Chairman Jerome Powell suggested Fed officials were poised to raise borrowing costs more than expected and were prepared to tolerate slower growth in the process.
It’s the increasingly ominous outlook for the United States that raises questions about whether Bank of Canada Governor Tiff Macklem can achieve the soft landing that many analysts are still hoping for.
Canada is expected to have both faster growth and lower interest rates over the next three years. This is a unique combination of economic outcomes given that countries are more insulated from global headwinds, including a potential US recession, but facing the same pressures to come together. there is no. The Federal Reserve is higher.
Money markets expect the Bank of Canada to halt the rate hike cycle at around 4% against the Fed’s benchmark rate, which peaked at around 4.6%, and stay below US short-term rates for at least another three years.
This coincides with the forecast that the Canadian economy will expand at a faster pace than the United States. According to a Bloomberg survey of economists conducted before the Federal Reserve’s decision, Canada’s growth will average 2.1% between 2022 and his 2024, while in the United States he will grow by 1.4%. % is expected. “The market has flipped the relationship between the Fed and the Bank of Canada,” Bank of Nova Scotia economist Derek Holt said in an email.
Historically, when Bank of Canada interest rates have fallen below Federal Reserve interest rates, that has usually not coincided with relatively strong growth in Canada. This suggests that the market may be underestimating his Macklem’s surge or overestimating Canada’s growth potential.
To be sure, rising commodity prices have given Canada’s income a strong tailwind, which helps explain the outperformance of economic growth, but it is no reason why interest rates need to be lowered in Canada. . New government spending aimed at helping Canadians cope with a higher cost of living is increasing inflationary pressure. there is
“If commodity producers continue to spend money on past consumption now, today, they will face less interest rate risk than net importers of commodities will find themselves in a policy stalemate in the years to come,” Holt said. Why is it considered?” he said.
One possible explanation is that underlying price pressures in the US are increasing, possibly due to tighter labor markets. Unlike its neighbors, Canada is attracting more immigrants, which in theory could at least ease pressure on wages and give room for non-inflationary growth.
August inflation data for both countries supports this theory to some extent, suggesting that price pressures are weakening in Canada, while inflationary forces are increasing in the US.
The Bank of Canada may be reluctant to raise borrowing costs given high household debt levels, but the argument suggests a weaker economy than many analysts expect outperformance. doing.
But history shows that Canada can sometimes take a different policy stance than the United States, but this divergence is limited because Canada’s economy is so closely tied to its southern neighbors. Few economists predict that there will be a large difference in inflation rates between the two countries over the next few years. Immigration, on the other hand, creates its own short-term inflation problems, especially in housing. And Canada’s low productivity figures mean economists have little confidence that potential growth will be much higher than that of the United States.
So far, the Bank of Canada has kept pace with the Fed throughout the first half of the year. Its overnight rate is slightly higher at 3.25% against the midpoint of the US Central Bank’s target range of 3.13%.
While Canadian policy rates have historically been above the Federal Reserve’s average, temporary increases in US short-term borrowing costs are not uncommon.
Since the mid-1990s, there have been four occasions when US interest rates have exceeded Canadian rates for several years. This often coincides with a period of global economic stress. In all but one case (1999-2000), the Canadian economy underperformed slightly, or at best matched US growth.
http://www.gulf-times.com/story/724762/Fed-s-hawkishness-casts-doubt-on-Bank-of-Canada-s- Fed hawkishness casts doubt on Bank of Canada’s soft landing