Greater interest rate sensitivity in Canada means that economic growth this year is likely to once again underperform relative to the U.S. We have pencilled in real GDP growth of 1.2% for Canada and 2.6% for the U.S. Below-trend growth in Canada should make the BoC confident that it has inflation under control. The Fed, however, does not have this luxury.
That opinion came from TD Bank, which operates in both countries, and it was before last week’s implication that the U.S. also has inflation under better control. Both countries have interest-rate announcements coming up in early September, and renewed confidence south of the border may solidify what the Bank of Canada is thinking.
After two straight cuts of .25 per cent, the Bank of Canada is in many quarters expected to make it three in a row on September 5. In the U.S., the Fed will make its next announcement on September 19. The rate in Canada is currently 4.5 per cent and in the U.S. it’s 5.25 to 5.5 per cent, where it has been for almost 13 months.
One American analyst — Investopedia in New York City — summed up the expectations like this: “There is speculation among traders on the likelihood of a cut of between 25 and 50 basis points.”
Interest rates in the two countries, obviously, do not always run parallel. However, economists imply that renewed confidence in the U.S. is generally believed to have a positive effect in Canada. Lowering the interest rate is always a sign of confidence.
The difference this time is that Canada started cutting rates first.
For more information on interest rates, call Jennifer (604-726-8768) or Dale (604-720-3353).