UPDATE 2-Bank of Canada economist signals Fed hike may not be matched

Thu Mar 12, 2015 12:01pm EDT
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(Adds remarks on oil prices, manufacturing, investment; background)

By Randall Palmer

OTTAWA, March 12 (Reuters) - Do not count on the Bank of Canada to match possible interest rate hikes by the U.S. Federal Reserve, one of the Canadian central bank's economists suggested on Thursday.

Economist Rhys Mendes told the House of Commons finance committee the Bank of Canada would view a Fed rate hike as a sign the U.S. economy is strengthening, which would be good for Canada.

However, asked whether a U.S. rate hike would put pressure on the Bank of Canada to raise rates itself, Mendes replied: "Not necessarily. The bank targets inflation in Canada and decisions regarding monetary policy in Canada would be based on the outlook for inflation."

While the Fed is widely expected to raise rates this year, possibly as early as June, the Bank of Canada reduced its overnight rate in January, and the market has partially priced in a further cut.

The bank's rate move followed a sharp fall in oil prices, which Mendes described as unambiguously negative for the Canadian economy. Canada is a major oil producer.

Mendes is deputy chief of the bank's Canadian economic analysis department, but he is not a member of the rate-setting Governing Council.

He said that in the absence of any monetary policy response to falling oil by the bank, overall Canadian output would have been about 1.4 percent lower by the end of 2016.   Continued...