Bad news for the loonie: Canada cuts interest rate as economy crawls

Farmers Forum staff

OTTAWA — The Canadian dollar isn’t likely to “crash” because of the Bank of Canada’s June interest rate cut and anticipated further rate cuts later this year, a Farm Credit Canada analyst suggests. But the looney will face downward pressure. That might be good for farmers when selling their crops, but terrible when buying inputs and manufactured goods.

With inflation cooling off in the anemic Canadian economy, the Bank of Canada (BoC) cut the overnight interest rate on June 5 a quarter point from 5 % to 4.75 %. The rate cut was the BoC’s first since March 2020.

While the move brings a little relief to heavily indebted Canadians and farmers, it also widens the interest-rate gap with the stronger U.S. economy, where the rate is 5.33 %. Too much divergence between Canadian and American interest rates results in a lower loonie as international investors sell off Canadian bonds (effectively dumping Canadian dollars) to buy better-performing U.S. bonds.

“While lower rates do not bode well for the Canadian dollar, that’s not to say the loonie is doomed,” writes FCC senior economist Graeme Crosbie. He says the loonie could strengthen towards the end of the year if the U.S. Federal Reserve cuts American interest rates, reducing the gap.

The Canadian dollar continued a gradual downward trend in the days after the rate cut, weakening to a little less than 73 cents U.S. by that Friday.

The Canadian economy is forecast to grow only 0.9 % in the second quarter of 2024. Critics have pointed out that this means the economy is effectively shrinking on a per capita basis because economic growth lags substantially behind Canada’s immigration-fuelled rise in population.