The decision by the U.S. Federal Reserve to keep interest rates steady while the Bank of Canada raises its rates could have positive implications for the Canadian dollar and the fight against inflation in Canada, according to Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist. Reitzes suggests that even a temporary divergence in rate paths between the two central banks could benefit the Canadian dollar, potentially reducing the need for the Bank of Canada to implement stricter policies. The Fed’s decision to maintain rates comes after the Bank of Canada recently raised rates by a quarter percentage point, and there are expectations for another rate hike in July. The Fed has also indicated that it may implement two more rate hikes later in the year. Both central banks are closely monitoring economic data in relation to inflation and labor market reports. If the Bank of Canada continues to raise rates while the Fed remains on the sidelines, Reitzes believes that the Canadian dollar will benefit, as investors tend to favor currencies associated with higher central bank rates. This can also alleviate the pressure on inflation and potentially allow the Bank of Canada to keep interest rates at a lower level. The Canadian dollar reached a four-month high before the Fed’s rate decision, driven partly by the strength in oil prices. A stronger loonie is advantageous for Canadians traveling to the U.S. this summer, as it increases their purchasing power. It also has an impact on import costs from the U.S., which can help reduce inflationary pressures. Reitzes suggests that a stronger Canadian dollar can support the Bank of Canada’s efforts to bring inflation back to its target of two percent. Ultimately, a stronger Canadian dollar could mean that the Bank of Canada doesn’t need to take as drastic measures to combat inflation.
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