The Bank of Canada may hesitate to make aggressive rate cuts until policymakers feel assured the U.S. Federal Reserve is ready to start lowering borrowing costs, Vanguard Group economist Roger Aliaga-Diaz said.

Fed policymakers last week shifted their forecasts for the path of interest rates, signaling just one cut in 2024. The Bank of Canada has already started an easing cycle — this month it became the first Group of Seven central bank to cut rates — but it may be reluctant to get too far ahead of the Fed, he said. 

Aliaga-Diaz thinks that “cuts every other meeting are more reasonable” to expect in Canada, he said in an interview with BNN Bloomberg. Governor Tiff Macklem and his governing council “may need to get assurances that the Fed will engage in a cut, even if it will come later.” 

Canada’s role as a major commodity exporter leaves it vulnerable to currency volatility, which may factor into the central bank’s thinking, Aliaga-Diaz said, even though it doesn’t explicitly manage policy for the exchange rate. The Canadian dollar has sagged 3.7 per cent this year versus the greenback, due to a combination of slower growth and decelerating inflation. 

A cut every other meeting would take the Bank of Canada’s policy interest rate down to 4.25 per cent by the end of the year, from the current 4.75 per cent. 

Citigroup’s Veronica Clark is predicting bolder action: she sees Macklem cutting at each of the four scheduled decisions in the second half of 2024, taking the policy rate down to 3.75 per cent, as the labour market weakens.   

Inflation should continue its march toward the central bank’s two per cent target, Aliaga-Diaz said, which means fixed-income investors enjoy a real yield. The 10-year Canada benchmark bond closed last week at a yield of 3.282 per cent. 

“It’s a good time to be in bonds. We say bonds are back,” said Aliaga-Diaz, who’s Vanguard’s chief economist of the Americas and global head of portfolio construction.