The Bank of Canada raised interest rates by 75 basis points to a 14-year high on Wednesday, while saying that the discount rate should be higher, given the fight against raging inflation. But unlike the US Federal Reserve, the Bank of Canada is better at restraining markets. And only the fall in oil prices forces the Bank to resort to harsh measures again.
The Bank of Canada follows the Fed's strategy. At the same time, it is more frank in its forecasts... and more successful
The central bank, in its usual interest rate decision, raised the discount rate to 3.25% from 2.5%, matching analysts' forecasts and reaching a level not seen since April 2008. The decision raised rates above the neutral range for the first time in about two decades. "Given the inflation outlook, the Board of Governors continues to believe that the discount rate should be raised even more," the bank said after an unprecedented fourth consecutive major rate hike.
The central bank also said that while headline inflation eased to 7.6% in July from 8.1%, this was due to gasoline prices, with key indicators continuing to rise. Prices in Canada are rising at a rate not seen since the early 1980s.
Obviously, Canadian regulators are more open in their forecasts and less inclined to sweeten the pill like the Fed.
This is not surprising.
Canadian exports fell 2.8% in July, mainly due to lower energy prices and lower consumer goods exports, while consumer goods and energy imports fell 1.8%, Statistics Canada said on September 7.
This was the first decline in Canada's exports in 2022 and the first decline in imports since January, which forced the central bank to tighten lending conditions again.
As a result of the decline, the country's trade surplus with the world fell to 4.05 billion Canadian dollars (3.07 billion dollars), compared with a downwardly revised surplus of 4.88 billion Canadian dollars in June. Analysts had forecast a CAD$3.80 billion surplus.
The value of exports has risen by almost a fifth this year, mainly due to higher prices, but then a sharp decline in prices led to a decline in the value of exports in July.
The data showed that exports of consumer goods in July decreased by 14.3%, and energy products - by 4.2%. In terms of volume, total exports grew by 1.7%.
At the same time, imports fell to 64.2 billion Canadian dollars. According to Statistics Canada, imports of consumer goods have been declining for the third consecutive month, with declines in most subcategories.
A combination of a hawkish stance from the Federal Reserve and a more uncertain outlook for the global economy as the energy crisis in Europe worsens has put pressure on the Canadian currency in recent weeks as well.
Nevertheless, the Canadian dollar has excellent prospects.
Thus, analysts are confident that the Canadian dollar will strengthen in the coming year, offsetting the recent decline against the stronger US dollar, which will be supported by good prospects for the domestic economy and rising interest rates.
If you follow its dynamics, you can see that its decline of about 4% against the safe-haven US dollar since the beginning of 2022 is much less than for all other G10 currencies.
And if risk aversion starts to ease, we may see the Canadian currency start to return to levels more in line with fundamentals. I still think Canada's economy will be slightly better than some of its G10 competitors.
The median forecast in the survey was that Canada's currency would appreciate 1.2% to 1.30 per dollar, or 76.92 US cents, in three months, compared with an August forecast of 1.28. Then it was expected that in a year it would rise to 1.25.
High commodity prices, along with a boom in demand thanks to the easing of COVID-19 restrictions, have helped Canada weather an economic storm that threatens to send many other wealthy countries into recession. Oil is one of Canada's main exports.
In addition, the inflation rate in Canada showed signs of peaking. The Bank of Canada has been one of the most aggressive major central banks in tightening monetary policy.
Money markets and economists expect the Bank of Canada to peak next year at rates between 3.75% and 4.00%. This is not a bad thing, as higher interest rates in Canada are attracting capital inflows that could support the loonie.
In real estate, too, not everything is terrible: soaring house prices in Canada will similarly fall sharply next year. But still, this fall will not be enough to make them affordable, as the Bank of Canada intends to continue to raise interest rates and keep them at a higher level. This is likely to push away some immigrants and slow down economic growth, however, if everything becomes critical, perhaps the government of Canada will take some subsidiary steps in this direction, and the problem will be solved.