The Bank of Canada is limited in how much its interest rate increases can lag behind those of the Federal Reserve, with the gap threatening to weaken its currency and fuel inflation, according to an economist at Bank of Nova Scotia.
(Bloomberg) — The Bank of Canada is limited in how much its interest rate increases can lag behind those of the Federal Reserve, with the gap threatening to weaken its currency and fuel inflation, according to an economist at Bank of Nova Scotia.
Canada’s central bank was able to tighten less than the Fed in previous cycles when core inflation north of the border was cooler — but that’s not the case right now, Derek Holt, head of capital markets economics, said in a note dated March 3. In Canada, inflation is still too hot, inflationary expectations are on the rise and the weakening loonie is flashing warning signs, he said.
“The magnitude of the policy rate deviation between the Fed and the BoC relative to differences in their macroeconomic circumstances makes me concerned about the extent to which it is assumed the BoC can fall behind the Fed,” Holt said.
The loonie has fallen to about $1.36 as of Friday, compared with $1.34 when Bank of Canada Governor Tiff Macklem declared a conditional pause in its rate hiking campaign. The bank is expected to hold its overnight rate at 4.5% in a decision to be released on Wednesday.
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