Interest rates in Canada and the United States | Big gaps have their limits, Tiff Macklem admits


(Ottawa) Bank of Canada Governor Tiff Mackle said Thursday that Canadian interest rates do not necessarily match U.S. or global rates, but that there is a limit to large deviations.




Mr. Macklem said this when he testified before the House of Commons Finance Committee along with the governor’s top aide, Carolyn Rogers, on Thursday.

“Our interest rates in Canada may not be the same as US or global rates. But there is a limit to how far they can diverge,” Mr Macklem said.

“We are nowhere near that limit,” he added.

The Bank of Canada is widely expected to begin cutting its key rate in the coming months, but forecasters believe the U.S. central bank will take longer to do so.

The Bank of Canada’s base rate currently stands at 5.00%, below the US Federal Reserve’s target range of 5.25% to 5.50%.

BMO Chief Economist Douglas Porter pointed out that the reason interest rates can’t diverge too much is because it would cause the Canadian dollar to depreciate significantly against the US dollar.

That would make imports from the United States more expensive and disrupt trade in the event of sharp currency fluctuations, he added.

Porter said the Bank of Canada needs to proceed with caution as the divergence in rates could also cause the foreign exchange market to overreact and further depreciate the Canadian dollar.

“There is a risk that foreign exchange markets will go crazy. In other words, they are overreacting to something that Canada might do,” he said.

The Federal Reserve did not cut interest rates on Wednesday. She warned that she would not cut them until she was confident that annual inflation would return to the 2% target in the United States.

The continued strength of the US economy has made it a world exception. Inflation has also been more persistent south of the border.

PHOTO KEVIN LAMARQUE, REUTERS

Jerome Powell, Chairman of the US Federal Reserve

“In recent months, inflation has shown no progress toward our 2% target,” said Jerome Powell, chairman of the Federal Reserve.

“It is likely that gaining that trust will take longer than expected,” he added.

On the other hand, the Bank of Canada was encouraged by recent progress on the inflation front.

Core inflation measures, which exclude price volatility, have moderated in recent months.

Year-over-year inflation in Canada was 2.9% in March, below the 3.5% rate in the United States.

Macklem said the Bank of Canada sees the right trends to start cutting interest rates, but wants those trends to continue longer.

Most observers expect the Bank of Canada to start cutting its key rate in June or July.

Mr. Porter said the Bank of Canada has some room to cut interest rates earlier than the Federal Reserve.

“Our view is that (the Bank of Canada) can cut once without the Fed. It might even be able to cut twice as long as the Fed’s next move is expected,” Mr. Porter argued.

“I think that’s about as far as the (Bank of Canada) can go without putting serious pressure on the Canadian dollar. »

With information from the Associated Press





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