A Fed cut could depreciate the loonie's competitiveness: Economist
The U.S. Federal Reserve lowered its benchmark interest rate by a quarter point Wednesday, the first cut since the financial crisis.
While Fed Chair Jerome Powell didn’t commit to further decreases, U.S. President Trump wasted no time hurling attacks at the central bank about the “disappointing” size of the cut.
It might not seem apparent at first, but the U.S. Federal Reserve’s decision has a significant impact on Canada and everyday Canadians. Here’s a look at how lower rates south of the border could ripple through our country, according to five experts.
Bank of Canada
“The Bank of Canada hadn’t shifted its rhetoric as drastically as the Fed did leading up to the Fed cut. Growth and inflation in Canada are both right where the BoC wants them to be, in contrast to the Fed statement that highlighted low inflation and a slowdown in some cyclical sectors in the U.S. including business investment. Overall, the fact that the U.S. economy is still relatively healthy is a positive for Canada given our dependence on the U.S. for trade. But, with the Fed now lowering rates and the BoC on hold, the Canadian dollar is poised to receive a lift, something that will eventually cause the BoC to become more dovish as the year progresses.”
- Katherine Judge, economist, CIBC Capital Markets
“Canadians can expect fixed rates to maintain their current levels, or possibly decrease, in the foreseeable future. Those with variable rates will only be affected if and when the Bank of Canada makes the decision to cut the key overnight rate.
“Low and declining mortgage rates in Canada also reinforce the current stable national housing market. Those shopping for a new home will appreciate the certainty of knowing that they can secure a mortgage at a relatively low rate compared to years prior. If mortgage rates do decline further in Canada, it’s possible that the Bank of Canada’s qualifying rate will decrease from its current rate of 5.19 per cent. This will make it even easier for first-time home buyers to qualify for their first home."
- James Laird, co-founder, Ratehub Inc.
“Taken at face value, a drop in U.S. interest rates should lower the dollar’s appeal. But with the Fed signalling concern about the global economy (and Donald Trump escalating his trade war against China), investors are downgrading the outlook for countries like Canada.
“Canadian interest rates have come down in sympathy with their U.S. counterparts, and this has dragged the loonie back below levels that prevailed a year ago.
“We expect more of this. If the Federal Reserve engineers a late-nineties style soft landing and bounces back, rate expectations should recover – and the dollar should maintain position relatively to the Canadian dollar. Alternatively, if the Fed fails to counteract the effects of the trade war on the wider economy, this will negatively impact Canada – and put pressure on [Bank of Canada Governor] Stephen Poloz to cut benchmark rates. In both cases, the Canadian dollar is vulnerable.”
- Karl Schamotta, chief market strategist, Cambridge Global Payments
“The last few months have seen a pickup in economic activity, but if Canada's largest trading partner stumbles economically, there will not be much to keep us all from being impacted. The real estate sector, which has been a huge support to the domestic economy in Canada, is going to be vulnerable and so will the financial institutions (banks and mortgage companies) that have significant exposure to it.
“Exports of goods and materials, a big part of Canada's economy, continue to be exposed to the global trade uncertainties. Non-cyclical sectors like technology and health care will provide some safety as will the traditional ‘defensive’ sectors like consumer staples and utilities. But remember, when traders and investors decide to sell, all risk assets (especially equities) will have a correlation of one, which means that they are all going down in unison until value hunters start to look for bargains.”
- Scott Tomenson, managing partner and chief investment strategist, High Rock Capital Management
“The uncertainty surrounding the next move by the Fed will likely create additional volatility in equity markets and the gold market, especially around each major U.S. data release and Fed statements, until a more solid direction is projected by the Fed. Gold is likely to benefit in this scenario in several ways – lower interest rates, increased liquidity, and increased volatility. Gold will also benefit from the increased volatility and uncertainty created by the U.S. administration.
“Easier U.S. monetary policy, all else equal, should help push the U.S. dollar lower. This in turn should support commodity prices. Our view is that the U.S. dollar is overvalued and will continue its long-term downtrend, which is one of our bullish factors for gold.”
- Chantelle Schieven, research head, Murenbeeld & Co.