Two Central Banks, Two Different Paths

This week, the Bank of Canada (BoC) and the US Federal Reserve made different decisions about interest rates.

The US Federal Reserve decided to keep its interest rate steady at 5.25% - 5.5%. They are concerned about high inflation and plan only one small rate cut later this year instead of three. They noted that the economy is doing well with strong job growth, but inflation is still too high.

On the other hand, the Bank of Canada lowered its interest rate to 4.75% and plans to cut it further next year. This is because inflation in Canada improved to 2.7% in April. Lowering this rate makes borrowing cheaper for Canadians, affecting things like mortgages and savings accounts.

Normally, both central banks move together to keep things stable between the two countries. If the BoC continues to cut rates while the Fed holds steady, it could weaken the Canadian dollar and raise inflation.

Economists believe a 10% drop in the Canadian dollar’s value would have the same effect as a 1% rate cut. They expect the BoC to be cautious and only cut rates four times this year instead of five, to avoid currency problems. However, they still see rates going down to help with mortgage renewals and slower population growth.