Bank of Canada might not follow Fed when rates increase

A hike in interest rates by the U.S. Federal Reserve would not necessarily be followed by a rise in Canadian rates, one of the Canadian central bank's economists suggested on Thursday.

In an appearance before the House of Commons finance committee, economist Rhys Mendes said the Bank of Canada would “not necessarily” raise rates in line with the U.S. central bank.

“The bank targets inflation in Canada and decisions regarding monetary policy in Canada would be based on the outlook for inflation," he said.

Mendes gave his assessment to the committee of the health of the Canadian economy in light of low oil prices 

He said the Bank of Canada’s move to cut rates in January was a result of the sharp drop in oil prices, which he said was “unambiguously negative for the Canadian economy.”

Mendes said if the bank hadn’t acted, the Canadian economy could have been held back.

A Fed rate hike is expected as soon as June and markets have been reacting this week to strong economic news that indicates the U.S. employment rate is approaching a target set by the Fed.

Mendes said if the U.S. central bank moves on rates, it will be a sign the U.S. economy is even stronger and that will be good for Canada.

That’s because our low dollar is boosting non-commodity exports, especially to our biggest trading partner.

But rebuilding of lost productive capacity in the manufacturing sector “won’t happen overnight,” he said.