OTTAWA – Canadian interest rates don’t have to match U.S. or global rates, says Bank of Canada Governor Tiff Macklem, but they should stay within a certain range.
Macklem made the comments while testifying before the House of Commons finance committee alongside Lieutenant Governor Carolyn Rogers on Thursday.
“Our interest rates in Canada do not have to be the same as those in the United States or global rates. But there is a limit to how far they can diverge,” Macklem said.
“We’re nowhere near that limit.”
The Bank of Canada is widely expected to begin reducing its policy rate in the coming months, while analysts expect the US Federal Reserve to take longer.
The Bank of Canada’s key interest rate currently sits at five per cent, which is below the Federal Reserve’s target range for the funds rate of 5.25 to 5.5 per cent.
BMO chief economist Douglas Porter said the reason interest rates can’t diverge too much is because that would lead to a significant depreciation of the Canadian dollar relative to the U.S. dollar.
That would make imports from the United States more expensive and disrupt trade if there are large currency swings, he added.
Porter said the Bank of Canada needs to tread carefully because a divergence in rates could also lead to an overreaction in the currency market, further depreciating the Canadian dollar.
“There is a risk that currency markets overshoot. In other words, overreacting to something that maybe Canada would do,” she said.
The U.S. Federal Reserve held interest rates on hold on Wednesday and signaled it will not cut them until it has more confidence that the annual inflation rate returns to the two percent target.
The current strength of the US economy has made it a global outlier. Inflation has also been harsher south of the border.
“In recent months, inflation has shown a lack of further progress toward our two percent goal,” said Jerome Powell, chairman of the Federal Reserve.
“Achieving that greater confidence is likely to take longer than expected,” he added.
Instead, the Bank of Canada has been encouraged by recent progress on the inflation front.
Core inflation measures, which exclude volatile prices, have eased in recent months.
Canada’s annual inflation rate was 2.9 percent in March, below the United States’ 3.5 percent.
Macklem has said the Bank of Canada is seeing the right trends to start lowering interest rates, but he wants those trends to continue for longer.
Forecasters generally expect the Bank of Canada to begin cutting its policy rate in June or July.
Porter said the Bank of Canada has some room to cut interest rates before the Federal Reserve.
“Our view is that (the Bank of Canada) can certainly cut once without the Fed. They might even be able to cut twice, as long as there is an expectation that the Fed’s next move will be to cut,” Porter said.
“I think that’s about as far as I think (the Bank of Canada) can go without causing pretty serious stress on the Canadian dollar.”
This report by The Canadian Press was first published May 2, 2024.
– With files from The Associated Press.