BoC Need Not Move With Fed

The Bank of Canada needs to consider the effect of an interest rate move by the Federal Reserve on exchanges rates and market rates, but does not need to keep pace with U.S. policy, a top official at the Bank of Canada said on Wednesday.

In a speech on capital flows, Deputy Governor Timothy Lane speculated about the impact on Canada of a hypothetical Fed rate hike, saying there would be a tightening effect via higher market interest rates and a stimulative effect as a weaker Canadian dollar boosts export competitiveness.

“It is important to note that the economic setting for such an interest rate move also needs to be taken into account: the Fed’s rate move would likely be made in response to a strengthening U.S. economy, which is itself typically favorable for our exports,” Lane said in prepared remarks to the Centre for International Governance Innovation in Waterloo, Ontario.

“We could directly observe the effects on interest rates and exchange rates prior to making a policy decision. And certainly, we would not consider the implication of such a move by the Fed in any mechanical way,” he added.

He said the bank’s track record of delivering low and stable inflation amid shocks gives it credibility to pursue independent policy amid globalized capital flows.

The Bank of Canada cut rates twice in 2015 and is not expected to raise them anytime soon, setting the stage for a divergence with U.S. monetary policy if the Fed raises rates in the coming months, as is widely expected.

Lane said the global financial cycle and Fed action can have implications for Canada, and those are “factored into” the bank’s decisions.

“We are free to adjust our policy interest rates in the context of Canadian economic conditions – and, in particular, do not need to move in step with the Federal Reserve,” he said.

In an apparent reference to the stunning U.S. election of Donald Trump, Lane noted that market interest rates and capital flows worldwide have shifted sharply over the past week, “along with changing perceptions of the direction of the economic policies of the United States.”

He did not comment further on the U.S. election, but said Canada should be supportive of other countries as they take actions to safeguard their economic and financial stability.

“A stable world is something from which we can all benefit,” Lane concluded.

Reuters

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