Last December, the United States raised interest rates by a quarter point- from 0.50% to 0.75%. Also for the first time since the year 2007, Canada has a lesser central bank rate than the United States. The Bank of Canada also announced that they were sticking to their monetary policy by holding its key rate at 0.5 percent.
With the US economy looking stronger and the rate of unemployment coming down, an increase is interest rates is necessary to combat the risk of higher inflation. The hike in interest rates is seen as a stamp of approval on the recovery. The federal reserve has raised the interest rates as they are confident enough in the recovery and things getting close to being normal. The US doing well is a positive indicator for Canada as the US is a huge consumer of energy and exports from Canada.
The monetary policies of Canada and the Unites States are very similar to one another. If the interest rates in U.S. shoot then Canada's rates will follow them. But this did not happen in the last December. This deviation is termed as divergence. The reason for this are the decisions taken by central banks which are based on their economies. Both the financial and economical divergence is likely to stay there for some time to come.
The hike in interest rates have an affect on the long-term interest rates in both the Canada and U.S. A rise in the long-term interest rates have put an upward pressure on the mortgage rates in Canada. However, as of now, it is not too serious to see that rates are moving broadly for the most part. For the homeowner and buyer, there is no need to panic. But is can be seen as a crack in the foundation of one of the most important economic support for housing. Interest rates are constantly rising which will lead to a spillover.
Pressure on loonie
The immediate victim of the interest hikes will be the loonie. When the rates were finally hiked last December, which was at a record low for six years, the Canadian Dollar lost its value by 16%. It has put a downward pressure on the Canadian dollar and has instead lifted the U.S. dollar against most of the currencies.
Canada is an oil producing nation. As the U.S. dollar gets stronger, the price of oil goes high for the people of Canada as it is priced U.S. dollar. The higher exchange rates between the two nations will outweigh the benefits of being an oil and gas exporter. Hence, leading to an increase in prices of oil as well.
The bottom line which can be drawn out is that the hike in interest rates will shatter budgets or destroy any of the business balance sheets. But if the U.S. keeps on following its trend of hiking the interest rates, then this will have an upward impact on all the borrowing costs. But, as of now all of this time quite to while to show its adverse effects.