Canada’s economic growth is weighed down by its sensitivity to interest rates when compared to the U.S., allowing the Bank of Canada to pause rate hikes while its counterpart continues to drive rates higher, according to one economist.

James Orlando, senior economist at TD Economics, said that Canada has started to see a “fairly significant slowing in economic growth.”

“When we look at the growth outlook for Canada, we have weaker growth coming through because of that extra sensitivity we have to higher rates in Canada versus what Americans are exposed to,” Orlando said in a phone interview on Thursday. 

Higher interest rates have begun to weigh on growth, he said, which can be seen with the “severe pullback” in Canada’s real estate market and lower consumer spending during the third quarter. 

Last week, the Bank of Canada increased its key policy rate by 25 basis points to 4.5 per cent, and signalled a conditional pause in its rate hike cycle. 

The U.S. Federal Reserve also increased interest rates by 25 basis points on Wednesday, bringing its benchmark rate to 4.75 per cent.

U.S. Fed Chair Jerome Powell said a “couple” more rate increases might be needed before it can pause its rate hike cycle. 


Orlando said the Bank of Canada’s conditional pause is not likely to be impacted by the U.S. Fed’s actions.

“We think the Bank of Canada doesn't need to follow what the Fed is doing,” he said.

“We think the Bank of Canada has done a pretty good job of communicating that it’s likely on the sidelines, probably for the next few months at least.”


Canada’s economy is both small and open, factors that are good for trade but allow for the potential impact of outside financial conditions, according to Orlando. 

“We do have to watch south of the border to see how the Fed acts and how they handle things right now because we do know that those financial conditions that would be potentially experienced in the U.S. would transfer into Canada,” he said. 

If the U.S. Federal Reserve takes its interest rate hiking campaign “too far,” then Canada could feel the effects, Orlando said.

Additionally, if borrowing rates increase in the United States, it could have a “trickle effect” on the Canadian real estate market, potentially driving mortgage rates higher.  


In a note to investors on Wednesday, Orlando said he thinks upcoming economic data will likely provide the U.S. Fed with enough information to “move to the sidelines.” 

“I think we're starting to see it now,” Orlando said regarding negative sentiment from business owners and consumers in the U.S. 

“Those [sentiment indicators] are very clearly pointing to a slowdown in economic growth.” 

Orlando said if this trend continues, it is likely to weigh on gross domestic product figures in the first quarter of this year, and by spring the U.S. Fed might have enough evidence to pause its rate hiking cycle.