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The US central bank just cut interest rates

The US central bank just cut interest rates

The US central bank just cut interest rates — so what do Canadian policymakers do next?

It’s your move, Canadian policymakers.

Last month, the US Federal Reserve slashed its benchmark rate by 25 basis points to a target range of 2 percent to 2.25 percent.

The last time the Fed trimmed its target was 2008, when the American economy was in the grips of the Great Recession.

Typically, central banks on both sides of the border act in tandem, so it begs the question: what should the Bank of Canada do next, with another policy-rate announcement scheduled September 4th?

Nothing. For the time being, at least.

So suggests Central 1 Credit Union in a recent report.

“At the Bank of Canada’s next rate announcement, it will not follow the Fed’s rate cut and remain on hold,” writes Central 1 Chief Economist Helmut Pastrick.

That’s been the Bank of Canada’s approach since late October 2018, when it last hiked its policy rate — which influences the mortgage market — by 25 basis points to 1.75 percent. It was the final in a series of five increases since summer 2017.

The central bank, which had kept rates low to stimulate economic activity through borrowing, was expected to keep nudging interest rates higher as the economy rebounded.

But slower-than-expected economic expansion and global trade uncertainty have since kept policymakers to the sidelines.

Pastrick expects this is where policymakers will stand until next year, noting Canada surpassed the US in terms of GDP growth in the second quarter (and the latter’s recent rate cut was more cautionary than a sign of outright weakness).

“A holding pattern in the Bank’s policy rates is expected through this year and into 2020 before easing with one quarter-point rate cut in April 2020 in response to Canada’s slowing growth and growth prospects,” writes Pastrick.

The possibility of more aggressive stateside trade policy is cited as one reason to anticipate a rate cut from the Bank of Canada.

“Tariffs by the U.S. could expand to include autos and other goods dragging down the European and Asian economies, commodity prices, and Canada’s economy. Based on past performance the chance of this occurring is high,” notes Pastrick.

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