Residential Market Commentary - American influence

Here is a situation that has not received a lot of attention over the past few years: Interest rate decisions by the central bank in the United States are influencing forecasts for rate moves in Canada. 

Last week the U.S. Federal Reserve bumped up its trend-setting rate by 25 basis-points.  It is the first increase in three years and moves the key rate into the 3.75% - 4.0% range.  The Fed’s rate-setting committee has also indicated it is prepared to do it again, before the end of the year, if necessary.  That has some analysts speculating on a rate hike in Canada sooner rather than later, potentially before the end of 2026. 

The Bank of Canada has been signalling a willingness to raise rates, for several months.  Canada’s Policy Rate remains at 2.25%, where it has been for eight consecutive settings. 

The U.S. Fed decided to raise its rate because of persistent inflation.  Higher prices are being fueled by increasing energy costs as a result of the U.S. lead war in Iran. 

The Bank of Canada’s interest rate policy has traditionally worked in concert with the Fed.  American rates can influence the value of the Canadian dollar and there are other, knock-on, effects.  An increase in the Fed rate usually increases the yield on U.S. government bonds.  In turn, that usually boosts the yield on Government of Canada bonds.  Because the interest on fixed-rate mortgages is priced off those bonds, it can mean higher borrowing costs for home buyers. 

Of course, if the BoC raises its Policy Rate to balance off currency and inflationary impacts from the U.S. hikes variable-rate borrowers will feel those increases right away.