Tiff Macklem has been testifying before the House of Commons finance committee
With the Federal Reserve deciding this week to keep U.S. interest rates on hold and appearing to be in no rush to cut amid a strong economy, what does that mean for Canadian rates?
With economists largely still expecting the Bank of Canada to make its first – and perhaps only – rate cut of 2024 in June, or possibly July, Governor Tiff Macklem has spoken about how tied to the Fed his committee’s decisions are.
Testifying before the House of Commons finance committee this week, Macklem said that there is a limit to how far Canada’s rate can diverge from those south of the border and in other major economies.
“Our interest rates in Canada don't need to be the same as the U.S. rate or global rates. But there is a limit to how far they can diverge," the governor said, adding “We're not close to that limit."
The U.S. target rate is currently 5.25% to 5.5% while Canada’s key rate is 5%.
Speaking to BNN Bloomberg, BMO economist Doug Porter said that moving too far away from the Fed would be bad news for the Canadian dollar relative to the greenback.
"There is a risk that the foreign exchange markets could overshoot. So, in other words, overreact to something that maybe Canada would do," he said.
But he said that it’s still expected that the BoC will announce a rate cut sooner than its American peer.
"They may even be able to cut two times as long as there is the expectation that the next move by the Fed will be to cut," Porter said. "I think that's about as far I think the (Bank of Canada) can go without causing some pretty serious stress on the Canadian dollar."
Following the recent GDP data release by Statistics Canada which showed a slower pace for the economy in February compared to January, economists from Canada’s major banks were confident that a cut would come in the summer.
