Taylor Rule 15-Year High Gap Signals Rate Jump: Canada Credit

The gap in Canadian and U.S. benchmark interest rates is at a 15-year high based on the Taylor rule formula for determining optimal rates, signaling borrowing costs are poised to rise further in Canada.

Using the Taylor rule, which measures inflation and output to estimate the ideal interest rate, the Bank of Canada’s benchmark should be about 2 percent, 1 percentage point higher than it is, according to Camilla Sutton and Sacha Tihanyi, currency strategists at Bank of Nova Scotia. The U.S. federal funds rate is 1.75 percentage points above its Taylor rule recommendation, which is below zero.