Bank of Canada Won’t Follow Fed’s Lead on Rates

Bank of Canada Governor Stephen Poloz wants to make something perfectly clear: When the Federal Reserve starts raising interest rates, Canada’s central bank won’t necessarily follow immediately.

“The main thing people should understand is that our policy is quite capable of being fully independent, as it has been these past few years,” Mr. Poloz said in an interview at the annual gathering of central bankers and economists at Jackson Hole, Wyo., over the weekend.

Mr. Poloz’s comments followed a speech by Janet Yellen, in which the Fed chair embraced the possibility that stronger economic growth could prompt the U.S. central bank to lift its benchmark lending rate sooner than expected. History shows interest-rate cycles in Canada and the United States are highly correlated. Many investors assume there is a “reaction function” in Canada to U.S. monetary policy: Where the Fed goes, the Bank of Canada must follow.

Mr. Poloz’s assertion that he will set his own path could inform speculation on Bay Street and Wall Street about when the Bank of Canada will adjust its interest-rate setting. Most analysts assume the next move will be an increase, and that higher borrowing costs will come in the summer of 2015. Current expectations are that the Fed will lift the federal funds rate from zero at roughly the same time, or a month or two earlier.

Mr. Poloz’s comments suggest the lag between the Fed’s first interest-rate increase since 2006 and the Bank of Canada’s shift higher could be longer than investors currently expect.

via The Globe and Mail

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza