Strategic View: Testing the Limits of Monetary Policy Divergence

The Bank of Canada rarely strays too far from the Federal Reserve’s (Fed) policy path. There’s a strong sense among Canadians that the Bank of Canada can’t diverge too far from the Fed because the resulting exchange rate depreciation would push domestic inflation too high. While exchange rate pass-through is important, it’s not typically the result of interest rate differentials.

Unless central bankers become worried about inflation expectations, it will be more important to monitor the currency’s impact on the real economy than on near‑term dynamics in consumer prices.