UPDATE 2-Bank of Canada says its policy can diverge from Fed's

Wed Sep 24, 2014 5:44pm EDT
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(Adds details, economist's quote)

By Leah Schnurr and David Ljunggren

OTTAWA, Sept 24 (Reuters) - Canadian monetary policy can diverge from that of its neighbor to the south, even as the U.S. Federal Reserve's exit from its extraordinary stimulus measures will likely raise market interest rates in Canada and weigh on the loonie, a Bank of Canada official said on Wednesday.

Deputy Governor Timothy Lane also warned that the unwinding of the Fed's policy could pose risks to the financial system globally as asset prices and volatility now reflect liquidity spawned by the accommodative actions of central banks in the United States and other countries.

While Lane said the U.S. Federal Reserve's exit from extraordinary monetary policies is "good news" for Canada as it is a sign a sustained U.S. economic expansion is underway, he added that the normalization of U.S. policy will act to tighten Canadian monetary and financial conditions.

At the end of the day, the Bank of Canada, when deciding policy, will assess the various effects of the Fed's moves in the context of the Canadian economy, Lane said.

"I want to stress that Canadian monetary policy is independent and can diverge from the Fed's policies," he said in a speech. "Looking forward, as always, our rate decisions will depend on the state of the Canadian economy."

The Bank of Canada's main policy rate sits at 1 percent, where it has been for the last four years, while rates in the United States have been at near zero since late 2008.

Many economists expect the Bank of Canada to stay on the sidelines on interest rates until well into next year. In contrast, the Fed is expected to end its bond purchase program in October and a recent poll forecast it will likely start to raise rates in the second quarter of 2015.   Continued...