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Economic Viewpoint

Strategic View: Testing the Limits of Monetary Policy Divergence

May 30, 2024
Royce Mendes, Managing Director and Head of Macro Strategy • Tiago Figueiredo, Macro Strategist

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.

NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.