The Bank of Canada announced yesterday March 7, 2023, that it would be pausing its interest rate increases, which had been in effect for the past nine consecutive meetings. While this news may have come as a relief to many Canadians, the reality is that interest rates may still be on the rise in the near future.
Quantitative Tightening and Its Impact on Interest Rates
One of the reasons for this is that the Bank of Canada has been pursuing quantitative tightening, which involves reducing its holdings of government bonds purchased as part of its quantitative easing program. This process can put upward pressure on interest rates as it reduces the money supply in the economy.
The Bank of Canada has indicated that its approach to quantitative tightening will be gradual and dependent on the strength of the Canadian economy and financial system. However, even a gradual reduction in the money supply could contribute to an increase in interest rates over time.
US Federal Reserve's Interest Rate Decisions and Their Potential Impact on Canada
In addition, the US Federal Reserve is expected to continue to increase interest rates in the coming months and years, which could put upward pressure on interest rates in Canada as well. The US and Canadian economies are closely linked, and changes in one can often affect the other.
The US Federal Reserve has indicated that any decisions about interest rate increases will be based on a variety of economic factors, including inflation, employment levels, and overall economic growth. The timing and pace of any rate increases will depend on the strength of the economy and how quickly inflation returns to the Fed's target level of 2%.
The Relationship Between Interest Rates and the Value of the Canadian Dollar
If the US Federal Reserve were to increase interest rates, this could lead to an increase in the value of the US dollar relative to other currencies, including the Canadian dollar. This would make Canadian exports relatively more expensive for US buyers, potentially decreasing demand for Canadian exports and negatively impacting the Canadian economy.
Potential Consequences of Rising Interest Rates for the Canadian Economy
On the other hand, if the Bank of Canada were to increase its own interest rates in response to the actions of the US Federal Reserve, this could lead to an increase in the value of the Canadian dollar. A stronger Canadian dollar could make Canadian imports relatively cheaper for Canadian consumers, but it could also make Canadian exports relatively more expensive for foreign buyers, potentially negatively impacting the Canadian economy.
Overall, while the Bank of Canada may have paused its interest rate increases for the time being, the fact that it is pursuing quantitative tightening and the likelihood that the US Federal Reserve will continue to increase interest rates means that interest rates may still be on the rise in Canada in the near future. Canadians should continue to monitor economic developments and be prepared for potential changes in interest rates and their impact on the Canadian economy.
