Last week the Bank of Canada increased the interest rate to 1.75%, causing other banks to increase their prime rates to 3.95%. Both Canada and the United States have been increasing their interest rates at similar intervals since June 2017, making traders forecast a similar pattern in 2019. However, the reason behind the hikes is very different.
According to the Bank of Canada, the country’s population growth, which is at its highest in six decades, has increased consumption and housing activity. Labour income has also increased with population growth. In comparison, the US boom is due partly to Trump’s tax cuts.
Based on this pattern, the Scotiabank expects an increase to 3% in interest rates by the first quarter of 2020. This will bring the Bank of Canada’s interest rates close to the Federal Reserve’s.
Immigration as a cause
The chief economist at National Bank of Canada said that the influx of migration in the recent years, which include mostly high skilled individuals, can boost the country’s growth. Moreover, most immigrants will settle in larger cities like Toronto and Vancouver, increasing demand for housing and lowering the risk of a price correction.
Although Canada has a strong population growth that can at the moment sustain the economy growth and the increase in interest rates, the Canadian economy is not at the same level as the US, and thus the Bank of Canada will not be able to hike the rates to match those of the southern neighbour.
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