Home / Financial News / Despite BofC’s dovish rate stance, a Fed hike may steepen Canada’s yield curve making borrowing more pricey
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Despite BofC’s dovish rate stance, a Fed hike may steepen Canada’s yield curve making borrowing more pricey

Central banks around the world are finding that low interest rates are just not enough to achieve targeted economic growth rates and so they are now upping the ante by implementing negative interest rate policies.

Canada may see higher bond yields and a steeper yield curve as the U.S. Federal Reserve begins to hike rates, according to market players, weighing on the economy while raising borrowing costs for consumers and businesses.

The U.S. central bank is widely expected to raise benchmark interest rates on Wednesday for the first time since June 2006, lifting the federal funds rate from zero to 0.25 per cent.

The Bank of Canada on Dec. 2 kept its key policy rate steady at 0.50 per cent, but the market is leaning toward another rate cut after crude prices fell further.

Higher borrowing costs will add another headwind to an economy hit by the oil price shock and offsetting the boost from planned fiscal stimulus by the new Liberal government.

The most sensitive part of the curve in Canada is going to be the 10-year maturity, according to Andrew Kelvin, senior fixed-income strategist at TD Securities, as the Bank of Canada’s dovish stance caps yields for shorter-dated maturities.

The steepening in Canada’s yield curve may gather momentum if forecasts for more Fed hikes are borne out. Besides Wednesday’s anticipated hike, the median projection of Fed policymakers in September on the projected path of interest rates was 1.375 per cent by end-2016 and 2.625 per cent by end-2017.

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