By Kim Mackrael

OTTAWA -- The Bank of Canada wouldn't respond mechanically to any future move by the U.S. Federal Reserve to raise interest rates, a senior central bank official said Wednesday.

Speaking before an audience in Waterloo, Ontario, Deputy Governor Timothy Lane said tighter monetary policy in the U.S. would lead to higher market interest rates globally, producing a tightening effect for Canada. At the same time, he said, a U.S. rate increase should result in a stronger U.S. dollar, making Canadian exports more competitive.

Mr. Lane said the Bank of Canada wouldn't consider those impacts in any "mechanical" way. Instead, the central bank can observe the effects of a U.S. move on interest rates and exchange rates before making a policy decision.

"We are free to adjust our policy interest rate in the context of Canadian economic conditions -- and, in particular, do not need to move in step with the Federal Reserve," Mr. Lane said.

BMO Capital Markets economist Doug Porter said the Bank of Canada has made it clear in the past that it doesn't need to follow the Federal Reserve on policy moves. For example, he said, Canada's central bank cut its key interest rate twice in 2015, at a time when the Fed was preparing for its first rate increase since the financial crisis.

"I think they've truly shown over the last couple of years that they're not joined at the hip with the Fed," Mr. Porter said.

Mr. Lane's comments were included in a speech on financial globalization, in which he made the case that a sound financial system and good governance have allowed Canada to benefit from the free movement of capital.Asked about Donald Trump's election win during a question-and-answer session after the speech, Mr. Lane said it was too early to comment on what the new administration might mean for Canada. However, he said the Bank of Canada would watch closely for future announcements on U.S. fiscal and trade policies.

"These are things we would factor into our economic outlook and forecasting, but at this point, I think it's really too early to gauge what those effects will be, and what effect they might also have on business confidence," he said.

Mr. Trump said during the election campaign that he would renegotiate the North American Free Trade Agreement, comments that have raised concerns in Canada over future access to U.S. markets. Canada sends about three-quarters of its exports to the U.S.

Many economists expect the Bank of Canada to leave its key interest rate at 0.5% through 2017 amid a sluggish export recovery and persistently weak business investment. The Federal Reserve, meanwhile, is expected to increase interest rates at its December policy meeting.

Write to Kim Mackrael at kim.mackrael@wsj.com

(END) Dow Jones Newswires

November 16, 2016 14:51 ET (19:51 GMT)

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