Fed's rate hike likely to influence Canadian economy

Due to the strong economic and financial links shared between the U.S. and Canada, there is typically a historical parallel between rate cycles in the two countries. This won't be the case this time around, and the Bank of Canada is likely to remain on the sidelines for quite some time after the Federal Reserve raises rates.

Despite the fact that the Bank's core inflation measure has been above 2%, underlying inflationary pressures in Canada's economy are more muted. Economic growth is set to improve in Canada, but it will take time to burn off the existing economic slack and see enough inflation pressures to require rate hikes.

Higher rates in the U.S. will still creep into Canada through the linkages in government bond yields, which affect many business and consumer lending rates. The implicit tightening in financial conditions will help keep inflationary pressures at bay and afford the Bank more time in ensuring that the Canadian economy is on a stronger footing before raising the policy rate, says TD Economics.