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The US Federal Reserve is expected to cut its interest rate growth on Wednesday for the first time in more than a decade – a big step, although it is likely that Canada's central bank will cut its holding pattern soon.
The Bank of Canada sent out signals earlier this month that the Canadian economy is very personal and, at least in the short term, has no reason to follow any move by the Fed to lower rates.
One thing seems certain – Stephen Poloz and the governor of Bank of Canada will spoil the Fed's explanation behind the decision.
"What matters most to markets, to economists, to global central banks is not what the Fed is doing on Wednesday – but why the Fed is moving," said Frances Donald, CEO and chief economist of Manulife Investment Management.
When Canadians look south of the border, Donald said, they need to worry deeply whether the Fed is cutting tariffs to deal with weak inflationary pressures or because it predicts the economy is going into recession.
"The reason is because if the US economy suffers a recession, so does Canada – with a six- to 12-month delay," Donald said.
"So, Governor Poloz will look very closely."
Earlier this month, Fed Chairman Jerome Powell signaled that a reduction in the US exchange rate is likely to cause slowdown in global growth and trade wars. He intended to announce the Fed's monetary policy at a news conference at 2:30 p.m. ET
The lending rate is currently set at between 2.25 and 2.50 percent, and it could be lowered to a target range of 2 to 2.25 percent.
Fed rate hike would be the first since the Great Recession of 2008. It would come at a time when the US economy is still in decent shape – the unemployment rate is as low as they have been in decades and the US consumer has confidence. looked strong.
The United States faces external challenges related to the global economy and trade conflicts. At home, inflation has gone below target and central banks may drop interest rates as a way to raise consumer prices.
Craig Alexander, chief economist at Deloitte, said the expected rate cut should be viewed as "insurance on economic expansion" and not a sign Powell is seeing a greater slowdown on the road.
The two central banks have not moved in a lockdown with rates going up, so they don't need to move in a lock, with rates going down– Economist Craig Alexander
"I do not think that the economic indicators, at this moment, are burning that a recession is upon us," Alexander said.
He sees no urgency for the Bank of Canada to follow the Fed's guidance.
"The two central banks have not moved in a lock with rates going up, so they do not need to move in a locked key with rates going down," Alexander said.
"It could be argued that the Fed has gone faster and now it will reverse some of that, so there is no pressure on the Bank of Canada to respond."
The Bank of Canada also needs to be careful about "spending ammunition," which could be used later to deal with relief, he said.
Alexander added that a tariff cut by the Fed may bring benefits to trade-dependent Canada by boosting US and foreign demand. It could also put additional upward pressure on the Canadian dollar.
Bank of Canada rate at 1.75%
Earlier this month, the Bank of Canada held its interest rate at 1.75 percent for a sixth straight policy meeting. Canadian economic growth has shown signs of a resurgence after it nearly stopped in late 2018 and early 2019.
The bank, however, showed no urgency at the July meeting to make a policy change, although the Fed had already signaled its intention to lower the US rate.
Carolyn Wilkins, the Bank of Canada's top deputy governor, explained at the time that the United States and Canada are at various points in the economic cycle.
"The fact that Canada picks up while the U.S. economy is slowing down sounds like a divergence. In fact, it's a process of convergence," said Wilkins, noting that Canada's interest rate has already been lower than the Fed's.
"The United States is slowing to a more sustainable pace, while Canada is back on its trend growth. By the second half of this year, growth should be similar in both economies, as they converge to their respective level of activity."
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