Can the Bank of Canada cut rates before the U.S.? What Macklem, economists say

The Bank of Canada will be watching its counterpart south of the border carefully as it gauges when to start cutting its benchmark interest rate. Here's why.

The head of the Bank of Canada says there’s a “limit” to how much Canadian monetary policy can diverge from the United States as market watchers see earlier cuts coming north of the border.

Governor Tiff Macklem was asked about the impact of U.S. monetary policy on the Bank of Canada’s interest rate path during an appearance at the House of Commons standing committee on finance Thursday morning.

He said the Bank of Canada’s benchmark interest rate, which remains at five per cent following six consecutive decisions, doesn’t need to mirror monetary policy from other central banks around the world.

But he added that there’s a “limit to how far they can diverge.”

“We’re not close to that limit. We have the ability to run our own monetary policy geared to what Canadians need,” he said.

The Bank of Canada’s policy rate is already lower than that of the U.S. Federal Reserve, which on Wednesday maintained its interest rate range of 5.25-5.5 per cent.

Jerome Powell, Macklem’s counterpart south of the border, said then that inflation was proving more stubborn than first thought, and that it “will take longer than previously expected” for the Fed to have the confidence it needs to cut interest rates.

James Orlando, director of economics at TD Bank, says a gap between Canadian and U.S. interest rates can weaken the exchange rate between the loonie and the U.S. dollar because investors gravitate to the American greenback to benefit from the higher rate.