Bank of Canada Just Announced it’s Pausing Interest Rate Hikes (VIDEO)
Changes in Interest Rates Affect the Cost of Borrowing For Consumers and Businesses Alike
Looking back to 2020, the Bank of Canada lowered its overnight interest rate to near-zero levels on March 3 and March 15, 2020, these cuts lowered the funds rate to a range of 0% to 0.25%.
This was done to stimulate the economy and support households and businesses. Now, The Bank of Canada recently announced this week, on Wednesday, the decision to pause rate hikes. This maintains the 4.5% rate.
The Bank of Canada’s interest rate policy significantly impacts the Canadian economy. One of the key tools at the Bank of Canada’s disposal is the interest rate. In this article, let’s dive into the Bank of Canada’s role in setting interest rates and impacting the current economy.
The Bank of Canada’s primary mandate is to “promote Canada’s economic and financial welfare.” To achieve this, it is responsible for setting monetary policy to maintain price stability, defined as a 2% inflation target. This shocked the U.S. market early this week, now anticipating a 0.50 BPS hike later this March. In contrast, with runaway inflation still impacting, Jerome Powell said some nasty things this week that investors did not want to hear.
Source: CTV News YouTube
Changes in interest rates affect the cost of borrowing for consumers and businesses alike. For example, when interest rates are low, mortgage rates are also low. However, the impact of the interest rate goes beyond borrowing costs. Changes in interest rates also affect the value of the Canadian dollar. When interest rates rise, the Canadian dollar tends to appreciate, making Canadian exports more expensive and potentially reducing demand for Canadian goods and services. Conversely, when interest rates fall, the Canadian dollar tends to depreciate, making Canadian exports more affordable.
To contrast, looking at the U.S. dollar, rate hikes or lack thereof can also impact the Canadian dollar. One strategy you can apply to your trading is “carry trading.”
A carry trade is an investment strategy that’s most often associated with foreign currency trading: An investor will borrow money in one currency at a low-interest rate and invest in a currency that has a higher interest rate, making a return that’s roughly equivalent to the difference between the two rates.
Will a more hawkish Fed force Bank of Canada’s hand, and do you think Canada made the right decision in pausing rates?
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