November 16, 2016 / 5:02 PM / 2 years ago

Canada need not move in concert with U.S. Fed: central bank

WATERLOO, Ontario (Reuters) - The Bank of Canada needs to consider the effect of an interest rate move by the Federal Reserve on exchanges rates and market rates, but does not need to keep pace with U.S. policy, a top official at the Bank of Canada said on Wednesday.

The Bank of Canada building is pictured in Ottawa July 19, 2011. The Bank of Canada held its key interest rate steady on Tuesday as expected but hinted more strongly than before that it would resume hiking soon as the sturdy domestic economy grows closer to full capacity. REUTERS/Chris Wattie

In a speech on capital flows, Deputy Governor Timothy Lane speculated about the impact on Canada of a hypothetical Fed rate hike, saying there would be a tightening effect via higher market interest rates and a stimulative effect as a weaker Canadian dollar boosts export competitiveness.

“It is important to note that the economic setting for such an interest rate move also needs to be taken into account: the Fed’s rate move would likely be made in response to a strengthening U.S. economy, which is itself typically favorable for our exports,” Lane said in prepared remarks to the Center for International Governance Innovation in Waterloo, Ontario.

“We could directly observe the effects on interest rates and exchange rates prior to making a policy decision. And certainly, we would not consider the implication of such a move by the Fed in any mechanical way,” he added.

He said the bank’s track record of delivering low and stable inflation amid shocks gives it credibility to pursue independent policy.

The Bank of Canada cut rates twice in 2015 and is not expected to raise them anytime soon, setting the stage for a divergence with U.S. monetary policy if the Fed raises rates in the coming months, as is widely expected.

Lane said the global financial cycle and Fed action can have implications for Canada, and those are “factored into” the bank’s decisions.

“We are free to adjust our policy interest rates in the context of Canadian economic conditions - and, in particular, do not need to move in step with the Federal Reserve,” he said.

In an apparent reference to the U.S. election of Donald Trump, Lane noted that market rates and capital flows have shifted sharply over the past week, “along with changing perceptions of the direction of the economic policies of the United States.”

Asked what impact Trump could have on Canada, Lane said it was too early to gauge the impact, including on business confidence.

“Once policies are announced, particularly with regard to fiscal policy and international trade, then these are things we would factor into our economic outlook and forecasting,” he said.

Additional reporting and writing by Andrea Hopkins and Leah Schnurr; Editing by Meredith Mazzilli

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