My economic take of the week
Why U.S. Interest Rates Matter to Canadians
Canada's interest rates don't exist in isolation. Because our economy and financial markets are closely connected to the United States, movements in U.S. bond yields can have a significant impact on Canadian borrowing costs.
U.S. Bond Yields Rise
When U.S. Treasury yields increase, U.S. investments can become more attractive to global investors.
Canadian Bond Yields Feel the Pressure
Canadian government bonds compete for the same global investment capital. Higher U.S. yields can therefore put upward pressure on Canadian government bond yields.
Fixed Mortgage Rates Can Rise
Canadian lenders use government bond yields as an important reference when pricing longer-term fixed mortgages. As bond yields rise, fixed mortgage rates can face upward pressure.
What About the Canadian Dollar?
The currency is another important part of the relationship. When U.S. interest rates rise relative to Canadian rates, investors may shift more money toward U.S. assets. This can increase demand for U.S. dollars and put downward pressure on the Canadian dollar.
A weaker Canadian dollar can make imported goods more expensive and contribute to inflation. This can make it more difficult for the Bank of Canada to cut interest rates aggressively.
Can Canada Become Less Dependent on the U.S.?
Canada cannot completely separate itself from the U.S. financial system. However, stronger productivity, greater business investment, deeper Canadian capital markets, improved infrastructure and fewer interprovincial trade barriers could make Canada's economy more competitive and resilient.
The objective is not complete economic isolation. Rather, it is to create an economy strong enough that Canadian interest rates and investment decisions are driven more by Canadian economic fundamentals and less by movements in U.S. markets.
The Key Takeaway
The Bank of Canada has more direct influence over short-term and variable borrowing rates, while government bond yields—and the broader global bond market—play a much larger role in determining longer-term fixed mortgage rates.
This is why Canadian fixed mortgage rates can sometimes rise even when the Bank of Canada is cutting its policy rate.