External Factors Relevant to Canada’s Rate Hike Decisions

In a recent Huffington Post article, Scott Boyd, a currency analyst at OANDA Corporation, made some interesting points regarding the hottest topic in Canadian economics, the future of interest rate hikes.
While I have generally focused on the domestic factors that will determine when the Bank of Canada will begin to increase interest rates, Boyd discusses some broader international factors that will also be relevant. For one thing, as everyone knows, the US is Canada’s most important trading partner (they receive more than 70% of our exports). As a result, the manufacturing and export side of our economy is tied closely to the Canada-US exchange rate. At the moment, the US economy is in a very precarious situation. As a result, US consumption of all goods (including those imported from Canada) is down. Moreover, the exchange rate is relatively high, putting Canadian exports at a severe disadvantage. Thus, it would be unwise to increase interest rates right now. A rate hike would cause an inflow of foreign investment dollars and a subsequent rise in the exchange rate, putting our exporters at an even greater disadvantage and harming the recovery prospects of the Canadian economy.
In addition, there is an informational advantage to holding off on a hike until at least October 2011. It gives the Bank of Canada a few more months to observe changes in both the American recession as well as the European debt crisis before making the important decision. Certainly, we can expect a continually greater emphasis on the future of Canadian mortgage rates in the coming days as the next interest rate announcement is due for July 19th, one week from today.