A December rate hike by the United States Federal Reserve would squeeze Canadian borrowers, with the October Producer Price Index due at 8:30 a.m. Eastern Time on Friday and a hike already fully priced by the market. Economists expect producer prices to rise 0.4 percent from September and 6.6 percent from a year earlier, after a hotter than expected consumer price report earlier in the week.
Why it matters
The market has already made up its mind about December. Rate futures are pricing in an 87.4 percent chance of a 25 basis point rate hike and a 12.6 percent chance of a 50 basis point hike at the December 8 and 9 meeting, and swaps traders are pricing at least a quarter point hike with a strong likelihood of another in January. The 10 year Treasury yield sits above 5 percent, and the two year note is on track for its worst week since 2024.
For Canada, the squeeze works through two channels. Higher United States rates pull capital south and pressure the loonie, and they raise borrowing costs for Canadian households and businesses that already carry heavy debts. The Bank of Canada watches the Federal Reserve closely, because a widening gap between the two policy rates is hard to hold for long.
What happens next
The backdrop is a Canadian economy already under strain from tariffs. Trade talks with Washington collapsed in August, leading to 50 percent American tariffs on about 20 billion dollars of Canadian goods, and Canada retaliated with levies on nearly 28 billion Canadian dollars of American products. A stronger United States dollar would add to the cost of imports for Canadian buyers.
For now, Parliament should be asking what the government plan is if the hike lands as priced. The producer price data on Friday will decide whether the case for a bigger move strengthens or cools, and Canadian borrowers will feel the answer either way.
The Bank of Canada watches the Federal Reserve closely, because a widening gap between the two policy rates is hard to hold for long. Canadian households carry heavy debts, and a stronger United States dollar would add to the cost of imports. The producer price data on Friday will decide whether the case for a bigger move strengthens or cools.
