© Reuters. FILE PHOTO: Bank of Canada Governor Tiff Macklem takes part in a news conference after announcing an interest rate decision in Ottawa, Ontario, Canada April 12, 2023. REUTERS/Blair Gable
By Ismail Shakil
OTTAWA (Reuters) -The impact of higher U.S. interest rates on the Canadian dollar is not a “major concern,” and the Bank of Canada (BoC) would have to react only if there is a substantial depreciation of the loonie, Governor Tiff Macklem said on Thursday.
Macklem, appearing before a Canadian Senate committee, was asked if the Federal Reserve’s continuing to raise rates could lead to the weakening of the Canadian dollar and hinder the BoC’s plan to tame high inflation.
Typically, higher rates in the United States than in Canada would strengthen the greenback over the loonie.
“That is not a major concern. We have an independent monetary policy, we have a flexible exchange rate,” Macklem told a Senate committee. In a floating exchange rate regime, a currency’s level is determined by supply and demand in the market.
“It’s something we’ll have to take into account if the (Canadian) dollar were to depreciate considerably,” Macklem said.
The Canadian dollar has weakened about 11% against its U.S. counterpart since June 2021, when inflation started to pick up, though year-to-date it is up 0.6% against greenback.
The BoC raised rates at a record pace over the past year to cool inflation, and then became the first major central bank to pause monetary tightening. It has left its key policy rate at a 15-year high of 4.50% at its last two policy-setting meetings.
The U.S. Federal Reserve, also fighting high inflation, has continued raising rates and is expected to deliver another 25-basis-point hike in May to take its key policy rate to the 5.00%-5.25% range, according to Reuters’ poll of economists.
“The Canadian dollar, it’s been reasonably stable … and largely that reflects the fact that the U.S. has also been raising interest rates very rapidly,” Macklem said.
“I don’t see a big problem if the U.S. is going a little higher than us. I think that’s kind of already built into the market,” he said.