By Paul Vieira
OTTAWA--There is a limit to how much Canadian interest-rate policy can diverge from the Federal Reserve, Bank of Canada Gov. Tiff Macklem said Thursday, as traders ponder how deeply Canada can cut rates without fueling further weakness in its currency.
Macklem testified Thursday before the Canadian legislature's finance committee, less than 24 hours after answering questions from the Canadian senate. He faced myriad questions over the two days about the Bank of Canada's ability to cut interest rates to help a struggling economy, while the Federal Reserve keeps rates at elevated levels due to a setback in slowing inflation.
Economists say a series of Bank of Canada cuts, combined with the Fed on hold, could weigh on the Canadian dollar. A weaker currency would make imports more expensive, as global trade is largely conducted in U.S. dollars, and thereby apply upward pressure on inflation. The Canadian dollar is roughly 4% weaker relative to the U.S. dollar so far in 2024, in part because traders anticipate Bank of Canada rate cuts ahead of the Fed.
"Because we have a flexible exchange rate we can run our own monetary policy, so our interest rates in Canada don't need to be the same as the U.S. rate," Macklem told Canadian lawmakers. "There is a limit to how far they can diverge, [but] we're certainly not close to that limit."
Later, a Conservative Party lawmaker, Marty Morantz, asked Macklem how much weakness in the Canadian dollar he's willing to tolerate. "I'm not going to draw a line in the sand," Macklem said. "Clearly, if we cut interest rates and that weakens the Canadian dollar, that is something you have to take into account."
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
05-02-24 1056ET
