The US and Canada, close allies and neighbors with the longest international border in the world—5,525 miles, when you include the border with Alaska—usually act in tandem in matters involving national security and fiscal policy, among other areas of close cooperation.
When it comes to interest rates, the Bank of Canada usually moves in lockstep with the Federal Reserve because the value of the Canadian dollar is closely pegged to the US greenback.
But the senior deputy governor of the Bank of Canada made it clear last week that Canada will chart its own course from now on regarding interest rate hikes—holding steady for now at the 4.50% ceiling it established on January 25.
Carolyn Rogers, in a speech in Winnipeg on Thursday, said BOC needs to do what’s best for Canada.
“We are seeing inflationary pressures come down a little more than they’re seeing in the US,” Rogers said, reported Toronto Star. “While we’re always thinking globally, we have to act locally. We must tailor our policy to Canadian circumstances.”
“As global inflationary pressures recede, each country will need to chart its own course to get back to price stability,” she added.
Inflation has come down from a peak of 8.1% in April 2022 to 5.9% in Canada in January’s CPI, a trend BOC expects to see continue. With the US inflation rate leveling off at 6.4% in January, the Federal Reserve is sending strong signals that it may pick up the pace of rate increases and take the current 4.75% benchmark rate in the US to a ceiling as high as 6%.
Rogers conceded that uncoupling BOC’s rate trajectory from the Fed’s—the two were closely aligned from March 2022 until the end of January—comes with the risk that the value of the Canadian dollar may depreciate, raising the price of imports and rekindling inflation.
“It is true that if our dollar depreciates [that means] imports coming into the country are more expensive. That can put upward pressure on inflation,” she said. “If that happens, that will have to get built into our forecast.”
Rogers emphasized that BOC’s rate pause is conditional on inflation continuing to cool in Canada—making it clear the central bank is prepared to pivot quickly if the CPI heats up again.
“If economic developments unfold as we project and inflation comes down as quickly as we forecast [then] we shouldn’t need to raise rates further,” Rogers said. “But if evidence accumulates suggesting inflation may not decline in line with our forecast, we’re prepared to do more.”
At its March 9 meeting, BOC held its benchmark rate steady for the first time in a year, after a series of eight rate hikes that began in March 2022, raising the prime rate from 0.25% to 4.50% in the fastest such surge in Canada’s history.
In her speech in Winnipeg, Rogers noted that Canada’s inflation rate is now the second-lowest in the G7, its economic growth has been the strongest in the G7 in the past 12 months and Canada’s employment growth also has been the strongest in the G7.
The citing of strong employment numbers as a positive in the fight on inflation illustrates opposing views of employment statistics by the two central banks: Federal Reserve tends to view rising employment as a harbinger of inflation, BOC sees it as a curative for labor shortages.
However, Rogers said BOC remains concerned that wage growth holding steady at close to 5% isn’t “compatible” with BOC’s target of a 2% inflation rate (the same target the Fed has established).
BOC wants to see corresponding productivity growth to justify 5% wage growth, but labor productivity in Canada has dropped for three straight quarters, she said.