The Bank of Canada says it won't necessarily move in lockstep with the Federal Reserve if the U.S. central bank moves to hike its key interest rate next month, as widely expected.
"We are free to adjust our policy interest rate in the context of Canadian economic conditions – and in particular, do not need to move in step with the Federal Reserve," deputy governor Timothy Lane said in a speech Wednesday in Waterloo, Ont.
Canada's economy will, nonetheless, feel the reverberations from whatever the Fed does. Mr. Lane pointed out that higher U.S. rates would likely send the Canadian dollar lower, boost exports and push up some rates here.
Canada's status as a net importer of foreign capital exposes the economy to the vagaries of global flows, Mr. Lane acknowledged.
The Bank of Canada would take the Fed's move into account, but won't feel compelled to match it, Mr. Lane said.
"The Bank of Canada would thus clearly need to take the net effects of the Fed's move into account, alongside other factors, in making Canadian monetary policy," he said.
Canada's central bank has kept its key rate unchanged at 0.5 per cent since two rate cuts in 2015.
Investors are betting that a Fed rate hike in December is now a virtual certainty in the wake of Republican Donald Trump's win in last week's U.S. Presidential election. Trading in Federal Funds futures suggests a better than 90-per-cent chance of a December hike.
And a top Fed official reinforced that view Wednesday, saying only a major economic shock would stop it from its first hike since December, 2015.
"You would have to have a surprise at this point," for the Fed not to increase rates, St. Louis Fed President James Bullard, a voting member of the U.S. central bank's rate-setting committee, told reporters at a UBS banking conference in London.
Canada is already feeling the reverberations of higher global interest rates, which ratcheted up following Mr. Trump's surprise win in last week's election. Some of Canada's major banks, including the Royal Bank of Canada, responded by raising some of their mortgage rates this week.
"Over the past week, market interest rates and capital flows worldwide have shifted sharply, along with changing perceptions of the direction of the economic policies of the United States," Mr. Lane pointed out.
Investors are now betting that Mr. Trump may push through a major infrastructure spending program as well as tax cuts. That would drive U.S. economic growth and push up inflation.
Fears that the United States could turn much more protectionist under Mr. Trump could also cause a flight by investors out of emerging market economies and into the relative safety of U.S. Treasury bills and other bonds.