In large part, the argument in favour of following the Fed has to do with the Canada-US exchange rate, which has mainly depreciated since the tightening cycle began a year ago, and which matters for an inflation-targeting central bank like the Bank of Canada. [...] In our view, even if the recent decline in the Canada-US exchange rate is mainly due to global rebalancing toward the US dollar – the so-called “safe haven effect” – and bumps inflation up a little, monetary conditions in Canada are still quite restrictive, which means the Bank need not mimic further hikes by the Fed. [...] Our other main reason for believing the Bank should not follow the Fed in lock step is that the Canadian economy is showing more signs of weakness than the American. [...] In part, this reflects the fact that the Bank began tightening before the Fed did. [...] The trade-off governor Macklem and his group must make between further tightening monetary policy in response to the Fed and allowing a short-term depreciation of the Canadian dollar is a delicate juggling act.
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