Bank of Canada Cuts Main Interest Rates

Bank of Canada is confident that inflation is slowing down. This is another pivot by Canada. They are the first to do this rate cut.

Questions you should be wondering…

• Does this put pressure on the U.S.?

• Will stocks go up?

• What does cutting interest rates actually do?

• When is the next interest rate decision?

Yes, a rate cut by the Bank of Canada can put pressure on the U.S. Federal Reserve (the Fed) to consider cutting its own interest rates, but the extent of this pressure and the Fed's response will depend on several factors:

Factors That Create Pressure on the U.S. to Cut Rates

This move can put some pressure on the U.S. Federal Reserve to do the same. Here’s why:

1. Investment Flows: Lower rates in Canada might attract investors there, making the U.S. dollar stronger and U.S. exports more expensive. To keep investments attractive and exports competitive, the U.S. might cut rates too.

2. Trade Competitiveness: A stronger U.S. dollar can hurt American companies that sell products overseas. Cutting rates could help make U.S. goods cheaper abroad.

3. Global Coordination: Sometimes, countries work together on economic policies. If Canada cuts rates to boost its economy, the U.S. might do the same to support global stability.

4. Economic Conditions: If the U.S. economy shows signs of slowing down or low inflation, the Fed might cut rates to help stimulate growth, especially if Canada's rate cut proves effective.

However, the Fed mainly looks at what's happening in the U.S. economy. They might wait and see how Canada's rate cut affects things before making a decision.

Will Stocks Go Up When Interest Rates Are Cut?

Yes, stocks often go up when interest rates are cut. Here's why:

1. Cheaper Borrowing: Companies can borrow money at lower costs to expand and grow, which can lead to higher profits.

2. Better Investment Returns: When savings account rates go down, people look for better returns, so they invest in stocks.

3. Higher Spending: Lower interest rates mean people have more money to spend, which can boost company earnings and stock prices.

So, when interest rates are cut, it usually encourages more investment in the stock market. The next decision is in July 2024.

What is an interest rate cut?

Example: If the Bank of Canada cuts its main interest rate by 0.25 percentage points:

• Mortgage Rates: A 7% mortgage rate might decrease to approximately 6.75%, especially for variable-rate mortgages.

• Savings Rates: The interest offered on savings accounts might decrease, leading to lower returns for savers.

While a central bank rate cut generally leads to lower interest rates across the board, the specific impact on different types of loans and savings can vary. The immediate reduction is more noticeable in variable-rate products, while fixed-rate products and savings accounts might adjust more gradually.