The Bank of Canada is stuck between a rock and a hard place
If the bank of Canada raises rates they eventually run the risk of causing a recession. And if they don’t raise rates that run the risk of “importing inflation” by weakening the Canadian dollar.
Recent economic data in the U.S. suggest the Federal Reserve is likely to keep interest rates in the United States higher for longer, leading to market expectations of at least three more quarter-point hikes from the central bank.
This presents a dilemma for the Bank of Canada, which may be forced to hike its benchmark rate as markets price in the Fed's rate increases.
The Canadian dollar has been affected by the U.S. dollar's recent strength, and the Bank of Canada's declaration that its hiking campaign is currently on pause to gauge how the economy is handling higher rates.
Markets had previously bet the Bank of Canada would start cutting rates this fall as inflation eased, but strong economic data and the languishing Canadian dollar have lifted the odds of a 25 basis point hike in July.
The Bank of Canada may consider deviating from the Fed in terms of rate hikes due to wage and price pressures being less intense in Canada, and Canadians being more indebted than U.S. households, making the country more sensitive to rates.
The lower Canadian dollar makes goods from the U.S., Canada's biggest trading partner, more expensive, and the Bank of Canada may not have the luxury of staying on the sidelines if the Fed continues to hike rates and drive the loonie lower.
“The sudden reassessment of the potential for even more Fed rate hikes follows soon after the Bank of Canada rather publicly planted its flag in the on-pause field.”
See the full story here: https://ca.finance.yahoo.com/news/why-inflation-us-problem-bank-of-canada-163757745.html
