Bank of Canada Says It Will Follow Canada’s Economy, Not Wall Street or the Fed

Bank of Canada Says It Will Follow Canada’s Economy, Not Wall Street or the Fed

OTTAWA — Canadians watching interest rates for clues about mortgages, borrowing costs and the loonie are getting a clear message from Bank of Canada Governor Tiff Macklem: Canada’s interest-rate decisions will be driven by what is happening at home—not by financial markets or whatever the U.S. Federal Reserve decides to do.

Macklem made the point as the Canadian economy faces an unusually complicated mix of forces. Trade tensions with the United States are weighing on growth, while elevated energy prices are pushing inflation higher. At the same time, financial markets are reacting to expectations about interest rates in both Canada and the United States.

The Bank’s most recent decision, on September 2, left its benchmark rate unchanged at 2.25 per cent. The next scheduled decision is October 28.

Canada is facing a different economic reality

Macklem's message comes as the economic paths of Canada and the United States increasingly diverge.

The U.S. economy remains relatively strong, while Canada's recovery is more fragile. The Bank said Canadian GDP rebounded by 3.3 per cent in the second quarter after very weak first-quarter growth. Yet the unemployment rate remained elevated at 6.4 per cent in July, and the Bank said the economy still had excess supply. Bank of Canada

That means a rate decision made in Washington does not automatically make sense in Ottawa.

"The Bank of Canada will set interest rates based on the Canadian economy," Macklem said, according to reporting on his remarks. The governor emphasized that differences between the two economies can justify different monetary-policy decisions.

What happens if the Fed moves?

This is where things get particularly interesting for Canadians.

The U.S. Federal Reserve has enormous influence over global financial markets. When American interest rates change—or investors anticipate that they will—bond yields, currencies and borrowing costs around the world can move.

But Macklem's position suggests Canadians shouldn't expect the Bank of Canada to simply mirror the Fed.

That doesn't mean the Bank can ignore the United States.

Canada's economy is deeply connected to its southern neighbour, and differences between Canadian and American interest rates can affect the Canadian dollar and financial conditions. Indeed, the loonie recently weakened as the gap between U.S. and Canadian government bond yields widened.

But those market effects are inputs into the Bank's analysis—not instructions.

Inflation is complicating the picture

The Bank is also facing a difficult balancing act.

Canada's headline inflation rate has been running around 3 per cent, largely because gasoline prices have climbed. At the same time, inflation excluding gasoline was 2.2 per cent in July, while core inflation measures remained close to 2 per cent.

That creates two competing risks.

Higher energy prices could push inflation higher and eventually spread into other goods and services.

But higher interest rates could put additional pressure on an economy that still has unused capacity and a labour market that has only recently begun improving.

Macklem acknowledged that tension in a September speech in Halifax, saying monetary policy cannot eliminate tariffs or control global energy prices. Instead, the Bank must determine whether those shocks are temporary or persistent enough to threaten Canada's inflation target.

The tariff problem

Trade policy is another major wild card.

The breakdown in Canada-U.S. trade negotiations and new American tariffs have created uncertainty for Canadian companies deciding whether to hire workers, invest or expand.

Macklem said businesses have already been adapting by changing supply chains, looking for new markets and adjusting investment plans. But renewed trade tensions could cause companies to delay decisions again.

For the Bank, that matters because weaker investment and hiring could slow economic growth, while tariffs themselves can increase the cost of goods.

In other words, one shock can push inflation up while simultaneously slowing the economy.

That's precisely the kind of situation that makes interest-rate decisions difficult.

What it means for Canadians

For households, the Bank's message has an important practical consequence: don't assume the next Canadian rate move simply because the Fed moves first.

Mortgage holders, prospective homebuyers, businesses and investors will instead have to watch Canada's inflation, employment, economic growth and domestic demand.

The Bank has also made clear that its ultimate objective remains keeping inflation close to its 2 per cent target.

For borrowers, that means the path of Canadian interest rates could differ from what financial markets expect based solely on developments in Washington.

And for policymakers, it means navigating a narrow path between two competing dangers: allowing inflation to become persistent, or keeping monetary policy too restrictive while the Canadian economy struggles to gain momentum.

The next test arrives in October

The Bank's next scheduled interest-rate announcement is October 28, when it will also release its next Monetary Policy Report.

Until then, markets will continue trying to anticipate what policymakers might do.

Macklem's message, however, is notably straightforward: markets can react to the economy, and the Fed can influence global financial conditions—but the Bank of Canada will ultimately make its decisions by assessing Canada's own economic reality.

For millions of Canadians carrying mortgages, managing debt or waiting for borrowing costs to fall, that distinction could matter considerably.