In the U.S. Federal Reserve’s latest decision, Chair Jerome Powell opened the door to an interest rate cut as early as next month. That appears to come in stark contrast to the stance Stephen Poloz has taken, where the Bank of Canada governor has said he still believes interest rates are poised to continue rising once headwinds to growth dissipate.

BNN Bloomberg asked economists and analysts whether the Bank of Canada can afford to not follow the Fed if it indeed cuts rates. Here’s what they had to say.

Ed Devlin, head of Canadian portfolio management, Pacific Investment Management Co.

Q: Can the Bank of Canada afford to not cut rates if the Fed does so?

A: The Bank of Canada is facing a meaningfully different macroeconomic environment, so I do not believe they will be in lockstep with the Fed. 

Both central banks are highly sensitive to trade policy and global growth. Canada’s inflation rate has recently been close to its two-per-cent inflation target, so [the Bank of Canada] is under less pressure to change monetary policy.

Q: What are the consequences if the Bank of Canada doesn’t follow the Fed in cutting rates?

A: If the Fed cuts 25 basis points, the Bank of Canada does not have to match. If the Fed cuts 50 basis points or more, it will be difficult for the Bank of Canada to stay on hold. The primary reason is the likely appreciation of the Canadian dollar, which would restrict financial conditions in Canada.

David Rosenberg, chief economist and strategist, Gluskin Sheff + Associates

Q: Can the Bank of Canada afford to not cut rates if the Fed does so?

A: There is a 90 per cent correlation between U.S. and Canadian monetary policy, so of course the Bank of Canada will follow. Canada is a price-taker, not a price-maker, on interest rates and the [Bank of Canada] does not live in isolation from what's happening in the rest of the world. Powell referred to weakness in the global economy three times in his opening remarks at his post-meeting press conference, and Canada is little more than a torque on world growth. The [Bank of Canada] may lag, to be sure, but it is destined to follow in the Fed's footsteps, as it has done in the past.   

Q: What are the consequences if the Bank of Canada doesn’t follow the Fed in cutting rates?

A: If the Bank of Canada stays on the sidelines, the Canadian dollar is going to strengthen – and end up working against the bank's desire to see a sustained rebalancing in the economy away from consumer spending and housing, towards the export and business sector.

Benjamin Tal, deputy chief economist, CIBC World Markets

Q: Can the Bank of Canada afford to not cut rates if the Fed does so?

A: The short answer is that the [Bank of Canada] can divorce itself from the Fed but only for a while. If the Fed indeed moves by 50 basis points in the second half, it’s not unthinkable that the [Bank of Canada] will choose to do nothing until next year – due to the fact that our tightening cycle was more muted and that our rates are lower than in the U.S.

Q: What are the consequences if the Bank of Canada doesn’t follow the Fed in cutting rates?

A: The number one impact will be on the Canadian dollar. The divergence in monetary policy is the reason we might see a temporary appreciation in the currency versus the U.S. dollar. We also see the U.S. yield curve steepening more than in Canada over the coming six months as we see long-term rates in the U.S. rising. 

Sherry Cooper, chief economist, Dominion Lending Centres

Q: Can the Bank of Canada afford to not cut rates if the Fed does so?

A: Yes, absolutely. Canada has no need for rate cuts. We have the lowest unemployment rate in the history of the data series, consumer spending has picked up, the economy is strengthening in the second quarter, and inflation is rising.

Q: What are the consequences if the Bank of Canada doesn’t follow the Fed in cutting rates?

A: Not much. The [loonie] might rise a bit, but it already has in anticipation of no action by the [Bank of Canada] even if the Fed cuts rates next month.

Brian DePratto, senior economist, TD Bank Group

Q: Can the Bank of Canada afford to not cut rates if the Fed does so?

A: I think that the Bank of Canada can afford to sit on its hands as the Fed cuts. The Fed is, in our view, taking out insurance cuts – keeping the economic backdrop solid and trying to mitigate downside risks. So, for Canada, the external economic backdrop isn't worsening. If anything it would be slightly better, all else equal, adding to a healthy domestic story.

It is also worth noting that the Fed cuts will result in easier financial conditions here – longer rates tend to move in sympathy to their U.S. counterparts, and we've already seen this happen at the five-year and in mortgage rates, for instance, even as the Bank of Canada has remained on hold.

Q: What are the consequences if the Bank of Canada doesn’t follow the Fed in cutting rates?

A: The obvious consequence is a strengthening of the loonie … But, more confirmation from the Bank of Canada that they are going to hold steady should take some of the Canadian cut pricing off, which would be positive for the currency, all else being equal.

Josh Nye, senior economist, Royal Bank of Canada

Q: Can the Bank of Canada afford to not cut rates if the Fed does so?

A: Whether the Bank of Canada follows the Fed in lowering interest rates would depend on why the Fed is easing. If the Fed is making pre-emptive rate cuts to help address uncertainty over trade policy, we don’t think the Bank of Canada has to follow. However, if the Fed is lowering rates because of an actual deterioration in economic activity, the Bank of Canada might be more inclined to ease alongside.

It’s important to keep in mind that the Bank of Canada hasn’t gone as far as the Fed in raising rates this cycle … There is more of an argument for the Fed to lower rates to get inflation back to target, whereas the Bank of Canada is already there.

Q: What are the consequences if the Bank of Canada doesn’t follow the Fed in cutting rates?

A: Generally speaking, if the Bank of Canada doesn’t follow the Fed in easing, we would expect a stronger Canadian dollar and less decline in market interest rates than if the Bank of Canada cut rates alongside the Fed.

Douglas Porter, chief economist and managing director, BMO Financial Group

Q: Can the Bank of Canada afford to not cut rates if the Fed does so?

A: Yes, they can afford not to cut. The only potential pressure point could be that the Canadian dollar will rise rapidly.

Q: What are the consequences if the Bank of Canada doesn’t follow the Fed in cutting rates?

A: The loonie is starting from a soft level. The market is already assuming the Fed will do more than the Bank of Canada in the way of cuts. And is anyone seriously concerned about the Canadian dollar getting too strong?