The Bank of Canada will make its own rate of interest decisions and never be influenced by policymakers beyond Canadian borders, a senior official said Thursday, a day after the central bank held its policy rate regular for the primary time in over a 12 months.
Senior Deputy Governor Carolyn Rogers affirmed the Bank of Canada’s independence to chart its own path on rates of interest during a speech to a business crowd in Winnipeg.
Her comments come because the U.S. Federal Reserve has signalled its own policy rate might have to rise higher than first expected. Economists have flagged the vulnerability of the Canadian dollar if the Bank of Canada lags its U.S. counterpart as a possible risk to the outlook for inflation and the broader economy.
But Rogers said that the Bank of Canada’s policymakers would determine its rate path based on the Canadian context, not what central banks beyond its borders are doing.
“Major economies world wide are highly interconnected — but while we’re all the time pondering globally, we now have to act locally. We must tailor our policy to Canadian circumstances,” she said, based on her prepared remarks.
“Canada, like other countries, has unique circumstances that may affect the trail of the economy and inflation. But that’s the advantage of an independent monetary policy: We will get back to our inflation goal of two per cent in a way that is sensible for us, just as other central banks are doing for them.”
Rogers was asked after her speech in regards to the pressure to maintain pace with the Fed and acknowledged that what happens within the U.S. economy will inevitably have knock-on effects in Canada that the central bank may need to contend with.
She said that while the Bank of Canada doesn’t goal exchange rates for the Canadian dollar with some other currency in its policy decisions, anything that lowers the forecast for the loonie might impact the central bank’s outlook for inflation.
“If our dollar depreciates, particularly against the currencies of our key trading partners, meaning imports coming into the country are costlier. That may put upward pressure on inflation,” she said.
“If that happens, that’ll need to get built into our forecast.”
But even when the Bank of Canada’s rate path diverges from the U.S. Fed, the central bank might tolerate a slight rise in inflation tied to higher imports, argues Randall Bartlett, senior director of Canadian economics at Desjardins.
He tells Global News that the Bank of Canada would typically consider a 0.3 percentage point increase in headline inflation for each 10 percentage points of depreciation within the Canadian dollar.
But Bartlett says that raising rates of interest higher just to maintain the loonie competitive with the U.S. dollar could have an outsized impact on the Canadian economy and households struggling to maintain pace with the already high cost of borrowing.
Given the high amounts of household debt Canadians are carrying without delay, a more aggressive stance from the central bank could cause the economy to “decline sharply” and greater than is warranted, he says.
“I feel the Bank of Canada probably, when it comes to the balance of risks, would relatively err on the side of not overtightening here than letting inflation run barely hotter by letting the Canadian dollar depreciate modestly.”
The Bank of Canada on Wednesday held its policy rate at 4.5 per cent following eight consecutive increases over the past 12 months. It maintained its wait-and-see approach on rates and left the door open to future hikes if inflation doesn’t fall based on its forecast.
Rogers said Thursday that despite inflation coming down overall recently, price pressures on services in Canada might want to slow further before inflation returns to the central bank’s goal.
While she said the Bank of Canada anticipates the tight labour market easing in months to return, she flagged that labour productivity is just not trending in the fitting direction.
“Productivity growth is very important since it helps businesses pay for higher wages,” she said.
“If we proceed to see the above-average wage growth that we’ve been seeing in Canada without stronger growth in productivity, it can be difficult to bring inflation all the way in which all the way down to two per cent.”
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