Posthaste: Economists breathe a bit easier over Canada, U.S. interest rate divergence and outlook for loonie

financialpost.com:

The divergence in interest rates between Canada and the United States became a hot topic and a percolating worry for economists when it looked like the Bank of Canada would feast on cuts while the U.S. Federal Reserve sat pat.

Now, some economists are starting to believe there may be less need to worry about such a divergence, given the latest inflation data released in both countries.

Statistics Canada on Tuesday said inflation slowed to 2.7 per cent year over year in June from 2.9 per cent in May, all but cementing expectations of a second 25-basis-point interest rate cut by the Bank of Canada on July 24.

U.S. inflation, released last week, showed the core consumer price index (CPI) rising at its slowest pace in more than three years, spurring markets to price in a possible September rate cut by the Fed. Previously, markets had expected it to cut only once in December.

“The BoC’s latest round of business and consumer surveys showed that inflation expectations are easing off on balance, which will also provide the BoC with more comfort to continue to cut rates,” Katherine Judge, a senior economist at CIBC Capital Markets, said in a note. “And it’s also looking like they will have to worry less about policy divergence with the Fed that is set to cut in September.”

Another economist echoed Judge’s take on divergence.

“Disinflation south of the border points to a Fed rate cut in September, which limits the divergence in the policy rates between the Bank (of Canada) and the Fed,” Tu Nguyen at assurance, tax and consulting firm RSM Canada LLP said.

Interest rate divergence swept onto the economic radar in the spring as the U.S. economy steamed ahead of its northern counterpart and economists began to forecast that the Bank