Tiff Macklem says higher interest rates having more bite in Canada than U.S.

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Bank of Canada governor Tiff Macklem said that high interest rates are biting harder in Canada than in the United States, likely setting the stage for the two countries’ monetary policy to diverge in the coming months.

Mr. Macklem told the Senate committee on banking, commerce and the economy on Wednesday that he and his team are growing more confident that inflation is on a sustainable path back to 2 per cent.

Several hours earlier, U.S. Federal Reserve chair Jerome Powell had delivered the opposite message in a press conference following the latest Fed rate decision. He said a string of hot U.S. inflation readings had made him less confident that it would be appropriate for the Fed to cut interest rates this year.

“The Canadian data and the American data are evolving in a slightly different way,” Mr. Macklem told the Senate committee. “Six months ago, the U.S. economy was getting some pretty good inflation readings, while our inflation was kind of sticky. In the most recent three months, we’ve been getting some more encouraging inflation readings.”

Consumer Price Index inflation in Canada has been slightly under 3 per cent for the past three months, while core measures of inflation have also been trending lower. In the U.S., headline inflation has been running closer to 3.5 per cent while core inflation has been moving up.

“More broadly, our economy has been much weaker than the United States. Monetary policy looks like it’s having more traction in Canada,” he said, pointing to the difference between U.S. and Canadian mortgage markets as one possible explanation.

In Canada, mortgage rates tend to reset every five years, while in the U.S., homebuyers can lock in for much longer terms. Canadians are also carrying much higher levels of household debt, making them more sensitive to rising interest rates.

Bank of Canada officials split on rate cut timing, but agree easing will be gradual

Most Bay Steet economists and investors expect the Bank of Canada to begin lowering rates either in June or July, with interest rate swap markets putting the odds of a June rate cut at 60 per cent, according to Refinitiv data. By contrast, traders don’t expect the Fed to begin lowering rates until September at the earliest.

The divergence between Canadian and U.S. interest rates could put downward pressure on the Canadian dollar. But Mr. Macklem downplayed this dynamic.

“What the Fed does has a big impact on us,” he noted. “Seventy-five per cent of our trade goes to the United States. So, the strength of demand in the United States impacts demand for Canadian exports, and our financial markets are very integrated. … But we have some differences, and we have the ability to take those into account as we run monetary policy.”

While Mr. Macklem highlighted how high interest rates are squeezing Canadian homeowners, his colleague, senior deputy governor Carolyn Rogers downplayed the risk that upcoming mortgage renewals could create financial stability problems.

Around 60 per cent of Canadians with a mortgage have seen their payments reset since the central bank started hiking rates. And so far, the data “don’t tell a story of a high level of stress,” Ms. Rogers said. Mortgage defaults remain at historical lows and the number of households in arrears, while rising, are still roughly in line with prepandemic levels.

The next leg of renewals could be more challenging. The other 40 per cent of homeowners will renew over the next two years, and many who took out mortgages at rock-bottom rates during the height of the COVID-19 pandemic are likely to face large payment jumps.

Ms. Rogers said that both banks and household are taking steps to manage this risk. “What banks are telling us is they are reaching out proactively to those borrowers. And most of them, they are preparing, so there we see people holding larger savings or liquidity buffers.”

She said the bank is monitoring the situation carefully. It will publish its annual financial system review on May 9.