Bank of Canada economist signals Fed hike may not be matched

OTTAWA: Do not count on the Bank of Canada to match possible interest rate hikes by the U.S. Federal Reserve, one of the Canadian central bank's economists suggested on Thursday.

Economist Rhys Mendes told the House of Commons finance committee the Bank of Canada would view a Fed rate hike as a sign the U.S. economy is strengthening, which would be good for Canada.

However, asked whether a U.S. rate hike would put pressure on the Bank of Canada to raise rates itself, Mendes replied: "Not necessarily. The bank targets inflation in Canada and decisions regarding monetary policy in Canada would be based on the outlook for inflation."

While the Fed is widely expected to raise rates this year, possibly as early as June, the Bank of Canada reduced its overnight rate in January, and the market has partially priced in a further cut.

The bank's rate move followed a sharp fall in oil prices, which Mendes described as unambiguously negative for the Canadian economy. Canada is a major oil producer.

Mendes is deputy chief of the bank's Canadian economic analysis department, but he is not a member of the rate-setting Governing Council.

He said that in the absence of any monetary policy response to falling oil by the bank, overall Canadian output would have been about 1.4 percent lower by the end of 2016.

He also said risks to the bank's assumed price for Brent crude of $60 a barrel were tilted to the upside over the medium term, given that a substantial amount of existing oil production is not profitable at that level.

"So you can imagine that supply would over time disappear," he said.

Mendes said business investment in the oil and gas sector should fall by about a third this year, and that the sector accounts for roughly one-third of total business investment.(http://www.bankofcanada.ca/2015/03/opening-statement-12-march-2015/)

That said, he noted manufacturers have said their investment and employment intentions had picked up.

"In addition, last year we saw Canada's non-energy exports pick up; we expect that to continue as a result of the stronger U.S. economy and the weaker Canadian dollar," he said.

"As that happens, we do expect investment to pick up. Capacity utilization in the manufacturing sector is rising and as demand continues to grow, that should translate into greater investment."

Mendes attributed the Canadian dollar's decline to both the U.S. dollar's rise and oil's fall.