Bank of Canada Contemplates Fed Rate Cut: Macklem and Economists Weigh in on What to Expect

Porter highlighted the necessity for the Bank of Canada to proceed cautiously, as any significant rate divergence could provoke an overreaction in foreign exchange markets, further weakening the Canadian dollar.

Federal Reserve’s Stance and Economic Indicators

Another popular question that has been doing rounds is “When is the Fed expected to cut rates?” so in contrast, the U.S. Federal Reserve opted to maintain interest rates, signaling a reluctance to cut them until greater confidence is attained in achieving the two percent inflation target. Federal Reserve Chair Jerome Powell attributed this caution to the persistent strength of the U.S. economy and inflation rates that have remained steadfastly above the desired threshold.

How Are Inflation Trends And Monetary Policy In Canada Affected By U.S. Fed Rate? 

The U.S. Rate-cut expectations from the Fed matter to Canada because they affect the exchange rate between the Canadian dollar (also known as the loonie) and the U.S. dollar. 

Here’s why:

Let’s say the U.S. Fed rate cut expectations (interest rates) are higher than those in Canada. Investors, seeking higher returns, would flock to invest in U.S. assets, like bonds or stocks, to take advantage of these higher rates. To do so, they need U.S. dollars. This increased demand for the U.S. dollar compared to the Canadian dollar can lead to a decrease in the value of the Canadian dollar relative to the U.S. dollar.

Now, why does this matter for Canada? 

A weaker Canadian dollar can have both positive and negative effects. On the positive side, it can make Canadian exports cheaper for foreign buyers, which could boost demand for Canadian goods and services abroad. However, it also means that imports become more expensive for Canadians, potentially leading to higher prices for goods and services domestically.

So, when there’s speculation that the U.S. Federal Reserve might raise or lower the Fed interest rate cut, it can influence the decisions of investors and traders, which in turn impacts the exchange rate between the Canadian and U.S. dollars. For instance, if the U.S. Fed rate cut is expected to rise while the Bank of Canada is expected to cut rates, this could lead to further depreciation of the Canadian dollar relative to the U.S. dollar.

Future Policy Adjustments and Economic Outlook

Macklem has expressed optimism about the potential for interest rate reductions, citing favourable inflationary indicators. However, he emphasized the need for sustained positive trends before any policy adjustments are made.

Forecast and Flexibility in Policy Response

Forecasters anticipate the Bank of Canada to initiate interest rate cuts in the forthcoming months, possibly as early as June or July. Porter suggested that Canada may have some flexibility to reduce rates independently of the Federal Reserve, provided there is an expectation of coordinated actions in the future.

As the global economic trend evolves, the Bank of Canada remains vigilant, ready to adopt policies to support stable economic growth and mitigate potential risks. For further updates on the news and the latest investment market trends, stay tuned with CanAm Bullion!