U.S. Federal Reserve hikes interest rates, but Canada not likely to follow suit

The U.S. Federal Reserve's interest rate hike could exert downward pressure on the loonie in the midst of its steady drop in recent months as global oil prices have plunged.

TORONTO — The U.S. Federal Reserve’s interest rate hike could exert downward pressure on the loonie in the midst of its steady drop in recent months as global oil prices have plunged.

The American central bank says it’s lifting its key rate by a quarter-point to a range of 0.25 per cent to 0.5 per cent, ending a seven-year period of near-zero borrowing rates.

Scott Guitard, a portfolio manager at Fiduciary Trust Canada, said climbing American interest rates will likely mean the opposite for the Canadian dollar.

He also predicts Canada’s central bank will stick with its decision to hold steady on its key lending rate even if the loonie falls further because of enduring low oil prices. The price of oil fell below $36 a barrel in mid-day trading.

Canada’s central bank has cut its own key lending rate twice this year.

Prime Minister Justin Trudeau, speaking in advance of the announcement, said it was a good sign that the American economy was seeing a resurgence, but promised to examine the challenges that a lower dollar poses for the Canadian economy.

“I think having the United States economy pick up steam is ultimately going to be good for Canada,” he said.

Trudeau added that a reinvigorated U.S. economy means more opportunities for Canadian companies selling their goods south of the border.

Speaking earlier this week, Bank of Canada governor Stephen Poloz said that Canadian and American interest rate policies will continue to diverge as the gap widens between their relative economic performance.

“We just want people to understand that usually we think of the Canadian economy following the U.S. economy fairly closely, and this will be one of those places where it really doesn’t,” he said.

James Marple, senior economist at TD Economics, called the the Fed move “relatively cautious and entirely achievable.”

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