Bank of Canada may hesitate to "get too far ahead" to fed
Since the US Federal Reserve (Feds) is still cautious in lowering its borrowing cost, the Bank of Canada may also be hesitant to implement “aggressive” interest rate cuts until the situation changes, said Vanguard Group economist Roger Aliaga-Diaz in a BNN Bloomberg report.
Last week, after the June 11 – 12, 2024 Federal Open Market Committee (FOMC) meeting, the Feds decided to maintain the current target range for the federal funds rate at 5.25% - 5.5% to control the inflation rate from spiraling. However, there is a possibility of one interest cut this year, while the Feds’ maintain its commitment to lowering the outstanding inflation rate to 2%.
According to Aliaga-Diaz, while the Bank of Canada has already started with the “easing cycle,” it is closely monitoring what the Feds will do in the coming days and the central bank may continue holding the rein when it comes to implementing rate cuts. The Bank of Canada has been able to implement one cut, recently, and was one of the Group of Seven central banks to do so, which brings the interest rates to 4.75%.
Aliaga-Diaz said, Governor Tiff Macklem and his governing council may still need assurance that the world’s economic superpower – the US – will engage in a cut, even if this will happen toward the end of 2024 before it decides to cut rates in full swing.
The economist said that it would be safe for the central bank to implement cuts “every other meeting,” which is reasonable. If this happens, Canadians can expect one or two more cuts this year, which will bring the interest rates down to 4.25% at the end of 2024, from the current 4.75%.
Meanwhile, the critical role that Canada is playing as a major commodity exporter, leaving it more prone to currency volatility is also a major factor that the central bank’s decision-makers are taking into consideration regarding interest rates, Aliaga-Diaz explained during his interview with BNN Bloomberg. Although, according to Aliaga-Diaz, it does not explicitly manage policy for the exchange rate. The Canadian dollar slipped by 3.7% against the US dollar because of the decelerating inflation rate and slower economic growth.
