By Paul Vieira

OTTAWA--Bank of Canada Gov. Tiff Macklem said Wednesday that weakness in the country's currency--which is flirting with a two-decade low--isn't playing a factor in interest-rate decisions.

Macklem said the central bank's policy rate remains in restrictive territory, and further rate cuts are expected to help fuel growth and keep inflation close to its 2% target.

"We've demonstrated we're prepared to do a 50-basis-point cut, and if we think that's appropriate to do it again, we'll do it again," he said in reference to last week's decision to reduce the policy rate to 3.75% from 4.25%.

In testimony before the senate, Macklem said the Canadian dollar is weaker relative to the U.S. dollar because of the central bank's four straight rate cuts totaling 1.25 percentage points. In contrast, the Federal Reserve has cut once by a half point. A weaker dollar adds stimulus to the economy, Macklem said, because exports become cheaper. Global trade is largely conducted in U.S. dollars.

"There are limits to how much we can deviate from the United States in our interest rate path without" triggering problems in the foreign-exchange market, Macklem told senators. "But we're not close to those limits. We've had bigger deviations in the past."

The Canadian dollar has weakened in the past month, and is nearing 20-year lows, said Doug Porter, chief economist at BMO Capital Markets. A U.S. dollar is equal to 1.39 in Canadian dollars, versus C$1.34 in late September. Porter said broad firming in the U.S. dollar is one reason explaining Canadian-dollar weakness, but so is the Bank of Canada's aggressive rate-cutting cycle.

Porter added the spread between U.S. and Canadian three-month debt securities has widened by the most since 1997, and he expects the Canadian dollar to remain under pressure over the next few weeks.

The central bank's target for the overnight rate has dropped to its current 3.75% level from 5% in early June. Most economists expect the policy rate to fall below 3%, and a few have argued it might be headed to 2%.

Macklem said the rate cuts are necessary because the Canadian economy is in a weaker state relative to the U.S. "The economy is growing but it's soft," he said. He added that the policy rate remains in so-called restrictive territory, or at a level that's weighing on economic activity.

Write to Paul Vieira at paul.vieira@wsj.com


(END) Dow Jones Newswires

10-30-24 1852ET