The Canadian central bank is cautioning that tighter US monetary policy might spill across the border and further suppress Canadian inflation already weighed down by plunging oil prices.
A Canadian bond-market gauge of expected annual inflation over the next decade, known as the break-even rate, tumbled last week to almost the lowest level since 2009 as commodities fell and Chinese stocks led a international equities rout.
Bank of Canada governor Stephen Poloz warned that rising US interest rates might increase Canadian borrowing costs, further curbing price gains by discouraging business and consumer spending.
Canada must keep an independent monetary policy as the US Federal Reserve raises interest rates, Poloz said in a speech on Thursday last week in Ottawa.
Rising US bond yields typically lead to similar moves for Canadian debt, which he said could create downside risk to Canada’s 2 percent inflation target. The Canadian dollar fell to a 12-year low this month on speculation the central bank might lower its lending benchmark as soon as Jan. 20, after it twice cut rates last year as oil prices fell.
“What Poloz wants to make sure is Canada doesn’t import the [US] Fed’s policy,” said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities in Montreal, and a former researcher at the central bank.
The Bank of Canada has stronger control over short-term rates through its policy lever than it does over the five-year bond yields that influence rates consumers pay on their mortgages, Poloz said in his speech.
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