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Among the good reasons for the Bank of Canada's hesitation on its next interest-rate move is one that the central bank doesn't like to talk about: the hesitation of the U.S. Federal Reserve on its next rate hike. It's the big, powerful elephant in the central bank's policy room.

And while the Fed continued to play its cards close to its vest, it remains on track for a December rate hike. That opens the door for its Canadian counterpart to follow suit as soon as January.

The Fed actually said little in Wednesday's rate-decision announcement to strengthen the case that it will resume rate hikes at its next meeting on Dec. 13. The statement was a near carbon copy of its previous one in September. It still sees solid economic growth and a strengthening labour market. It's still fretting over sluggish core inflation, but believes that will pass.

But it didn't have to say anything. The financial markets have already priced in nearly a 90-per-cent probability of a December rate increase. Just by sticking to script, the Fed has all but rubber-stamped the market's expectation.

Officially, the Bank of Canada feels no compulsion to follow the Fed's monetary policy direction. Just this week, in an appearance before a parliamentary finance committee, Bank of Canada Governor Stephen Poloz dodged a question about his Fed interest-rate expectations, emphasizing that as a rule, central banks don't opine on other central banks' rate policy. And the Bank of Canada's decision to raise rates twice over the summer, while its U.S. counterparts twiddled their thumbs, testifies to the Canadian policy makers' willingness to diverge from its powerful neighbour and go its own way.

However, as it began marching up its own rate-hiking road, the Bank of Canada pretty quickly saw a key obstacle rise in its path: The Canadian dollar. And this is where, regardless of his willingness to talk about it, Mr. Poloz knows all too well his own rate policy is inevitably tangled with that of his U.S. counterpart.

The loonie surged 10 cents (U.S.) from early May to early June, largely because the Bank of Canada first signalled its intention to begin raising rates, and then followed through in July and September. The divergent rate paths between Canada and other countries, particularly the United States, served as an unequivocal buy signal for the Canadian currency.

It's no mere coincidence that as this rally gained momentum, two key elements to the Bank of Canada's game plan got knocked off the rails: Exports and inflation. Both have suffered under the stronger dollar, and their loss of momentum is a big reason the Bank of Canada has been signalling, as recently as its own rate decision last week, that it has grown cautious about further rate increases.

The currency's effect on inflation is especially problematic for the central bank, as its rate policy is formally tied to pursuing a 2-per-cent inflation target. In its quarterly Monetary Policy Report last week, the central bank pushed back the expected timing of inflation's return to the target by a few months, while estimating that the currency appreciation will slice a half-a-percentage point off the inflation rate by the second quarter of next year, before its effects begin to fade.

But now there's an expectation that the two central banks are set to diverge in the other direction, as Canada pulls back on the rate throttle while the United States prepares to steam ahead. And that is already taking considerable pressure off the Canadian dollar. Since mid-September, when the Bank of Canada started cooling expectations of further rate hikes, the loonie has given back half of its earlier gains. Over the same period, inflation has started to come back to life, though at 1.6 per cent, it still has a long way to go to reach target.

If, indeed, the Fed does start hiking while the Bank of Canada continues to signal that it's in a holding pattern, we can expect a further reversal of the dollar's gains – and a corresponding improvement in the inflation prospects. A currency-related rebound in exports would also help the economy recover from what was a sluggish third quarter, and convince the Bank of Canada that growth is strong and sustainable enough to warrant further increasing its key rate from its still highly stimulative levels.

But while the writing may be on the wall for a Fed move, it's not guaranteed. Given that U.S. President Donald Trump is expected to announce Thursday that he will replace Fed chair Janet Yellen with his own choice when her current term expires early next year, and that several other vacancies on the Fed's policy-setting committee will also soon be filled by Trump appointees, there is some understandable uncertainty around the Fed's future policy leanings. The Bank of Canada might want to wait until at least one more Fed hike is in the bag before it re-opens its own rate-hiking discussions.

With the Bank of Canada's next rate decision coming one week before the Fed's next meeting, this suggests that we can forget about another Canadian rate hike at that time. But if the Fed sticks to the apparent plan and does resume rate increases in December, the Bank of Canada will benefit from a considerably smoother path to its own rate decisions in the new year.

Bank of Canada governor Stephen Poloz said the choice to hold its benchmark interest rate steady at 1 per cent came from uncertainty over the impact that two prior rate hikes will have on Canada’s economy.

The Canadian Press