Weaker loonie may not deter Bank of Canada diverging from the Fed
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Weaker loonie may not deter Bank of Canada diverging from the Fed
TORONTO (Reuters) - The Bank of Canada would be willing to cut interest rates three times ahead of the Federal Reserve's first move before a declining currency threatens to endanger the inflation outlook, the median estimate of seven analysts in a straw poll showed.
A weaker Canadian dollar versus the greenback this year has sparked debate among investors about how much the BoC would be prepared to diverge from its U.S. counterpart.
Investors expect the Canadian central bank to begin rate cuts in June or July, with next Tuesday's inflation reading seen as a key input. But the Fed is seen on hold until September, even after cooler-than-expected U.S. inflation data on Wednesday.
The BoC's benchmark interest rate, at 5%, already sits 38 basis points below the midpoint of the range set by the Fed for its policy rate. Further widening in the differential could add to pressure on the loonie.
Still, analysts say it would take a large move in the currency to drive up import costs enough to put at risk the central bank's efforts to lower inflation to a 2% target.
A higher cost of imported goods tends to raise the prices that businesses charge to consumers.
"Although there's a theoretical limit to how far the Bank of Canada can set its own policy rate beneath the Fed funds rate, it's likely well below current levels," said Karl Schamotta, chief market strategist at Corpay.
The Canadian dollar has already weakened nearly 3% against its U.S. counterpart since the start of the year, to 1.3640 per U.S. dollar, or 73.31 U.S. cents, as the greenback climbed against a basket of major currencies.
