mouserman wrote: TD Economics sees the Bank of Canada beginning to lower rates this summer, accelerating cuts into the end of 2024. TD expects the Fed to begin cutting in December.
“That means the spread between the Bank of Canada and Fed policy rates would hit 125 bps, before the Fed starts to accelerate its own rate-cutting pace,” Orlando wrote in a research note last week. “This implies that the Bank of Canada will be managing monetary policy according to what is happening in Canada, with an eye fixed on what’s happening in the U.S.”
While the neighbouring economies have historically moved in the same direction, Canada has persistently underperformed in recent years.
Jaffery says the main argument for limiting divergence between the Bank of Canada and the Fed is the inflationary impact of weakening the loonie. That would be a bigger deal, he says, if both economies were firing on all cylinders.
“Importing firms in Canada don’t have a lot of room to pass on higher prices to consumers, and will likely be forced to absorb some of the higher cost of imports through lower margins. The inflationary impact should therefore be somewhat smaller compared to an environment where both economies were strong,” he wrote. “As the Bank tries to find the limit of how far it can diverge from the Fed, for now, it should be free to run its own race.”
Orlando also hopes Macklem won't be overly swayed by factors south of the border when deciding the trajectory of rates in Canada.
"If there is one thing we have learned since central banks started hiking rates, it’s that interest rates affect economies differently," he wrote. "The Canadian central bank needs to react to what is happening at home."