Why the U.S. Fed’s oversized rate cut matters to Canadians
The U.S. Federal Reserve’s 50-basis-point interest rate cut on Wednesday is set to have ripple effects north of the border, with experts pointing to implications for both the Bank of Canada and Canadian mortgage holders.
The Fed delivered an oversized step for its first interest rate cut in four years, a move that surprised many economists who had expected a standard quarter-point cut.
To the north, the Bank of Canada is well-entrenched in its own easing cycle, having cut its policy rate by 25 basis points three times since June.
But Nathan Janzen, assistant chief economist at RBC, says the Fed’s moves will be felt in the Canadian bond market as well, an important proxy for mortgage rates in Canada.
Bond yields take their cues from central bank policy rate expectations in both the U.S. and Canada. These also act as benchmarks for key lending rates from Canadian banks, with the five-year government of Canada bond yield closely informing lenders’ five-year fixed mortgage rates, for example.
Janzen tells Global News that “what happens to the U.S. bond yields has implications for Canada.”
Because of how tightly knit the Canadian and U.S. economies are, significant shifts south of the border can impact financial markets to the north, he explains. That includes bond yields seeming to move “in co-ordination” with each other.
“That’s in part reflecting the fact that our economies historically have been closely correlated and so have been monetary policy responses,” he says.
While the five-year GoC bond yield has been largely trending downward as the Bank of Canada charts a path for lower rates, the moment of the U.S. Fed’s half-point cut on Wednesday coincided with a nearly 50-basis-point drop in the yield as well.
Yields have
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