The Bank of Canada will make its own interest rate decisions and not be influenced by policymakers beyond Canadian borders, a senior official said Thursday, a day after the central bank held its policy rate steady for the first time in over a year.
Senior Deputy Governor Carolyn Rogers affirmed the Bank of Canada’s independence to chart its own path on interest rates during a speech to a business crowd in Winnipeg.
Her comments come as the U.S. Federal Reserve has signalled its own policy rate might need 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 wider economy.
But Rogers said that the Bank of Canada’s policymakers would decide its rate path based on the Canadian context, not what central banks beyond its borders are doing.
“Major economies around the world are highly interconnected — but while we’re always thinking globally, we have to act locally. We must tailor our policy to Canadian circumstances,” she said, according to her prepared remarks.
“Canada, like other countries, has unique circumstances that will affect the path of the economy and inflation. But that’s the advantage of an independent monetary policy: We can get back to our inflation target of two per cent in a way that makes sense for us, just as other central banks are doing for them.”
Rogers was asked after her speech about the pressure to keep pace with the Fed and acknowledged that what happens in the U.S. economy will inevitably have knock-on effects in Canada that the central bank might have to contend with.
She said that while the Bank of Canada does not target exchange rates for the Canadian dollar with any 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, that means imports coming into the country are more expensive. That can put upward pressure on inflation,” she said.
“If that happens, that’ll have to get built into our forecast.”
But even if 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 factor in a 0.3 percentage point increase in headline inflation for every 10 percentage points of depreciation in the Canadian dollar.
But Bartlett says that raising interest rates higher just to keep the loonie competitive with the U.S. dollar could have an outsized impact on the Canadian economy and households struggling to keep pace with the already high cost of borrowing.
Given the high amounts of household debt Canadians are carrying right now, a more aggressive stance from the central bank could cause the economy to “decline sharply” and more than is warranted, he says.
“I think the Bank of Canada probably, in terms of the balance of risks, would rather err on the side of not overtightening here than letting inflation run slightly 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 year. It maintained its wait-and-see approach on rates and left the door open to future hikes if inflation does not fall according to its forecast.
Rogers said Thursday that despite inflation coming down overall recently, price pressures on services in Canada will need to slow further before inflation returns to the central bank’s target.
While she said the Bank of Canada anticipates the tight labour market easing in months to come, she flagged that labour productivity is not trending in the right direction.
“Productivity growth is important because it helps businesses pay for higher wages,” she said.
“If we continue to see the above-average wage growth that we’ve been seeing in Canada without stronger growth in productivity, it will be difficult to bring inflation all the way down to two per cent.”
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