Commentary: Canadian rates are not necessarily beholden to U.S. Fed

Canada won’t automatically follow the lead of the U.S. Federal Reserve in terms of rates, according to markets observer Kevin Carmichael.

In a new analysis for the Financial Post, Carmichael noted that while the Canadian and U.S. economies have deep, long-established links, “the Bank of Canada’s room to manoeuvre is much wider than some tend to think.”

“Any assumption that the Bank of Canada will be cutting interest rates in the foreseeable future is based on economic weakness that has yet to show itself in the data, which continue to show that Governor Stephen Poloz and his lieutenants had it about right in April when they predicted growth would rebound from a lousy winter,” the columnist wrote.

Latest readings placed Canadian inflation at around 2%, which falls well within the target range proposed by Poloz.

“Interest rates in Canada still are stimulative: the benchmark is below inflation, so real borrowing costs are negative. The Bank of Canada and other authorities appear only now to be getting the post-crisis credit binge under control. Poloz and his lieutenants will need convincing evidence that the economy is heading off the rails to undo all that hard work now.”

A considerably tough girder will be the petroleum sector, Carmichael added, citing high levels of optimism towards the oil industry for the next 12 months (as seen in the central bank’s latest business sentiment survey published last week).
These trends, combined with lower borrowing costs and a stronger employment climate, are contributing towards overall stability in the medium term.

Statistics Canada data indicated that last May, core inflation surged to its highest level of 2.07% since February 2012, which gives the BoC further room to hold interest rates steady.

The figure might be pointing towards a recent easing of the economic slowdown – highly likely, considering that all eight major components of Canadian inflation accelerated in May, StatsCan added.

MBN

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