(Bloomberg) -- The Bank of Canada’s policy interest rate may fall 100 basis points below that of the Federal Reserve’s “without policymakers batting an eye,” according to economists at one of the country’s largest lenders.

That’s because the Canadian central bank can ease rates more aggressively than markets are currently pricing before it would see a “material” weakening of the loonie, National Bank of Canada economists Taylor Schleich and Warren Lovely said in a report to investors Thursday. 

Overnight swap markets are pricing in about 55 basis points of cuts in Canada by year end, compared with 35 basis points in the US. The majority of economists in a Bloomberg survey expect the Bank of Canada’s first cut to happen in June after price pressures have cooled in recent months.

Schleich and Lovely pushed back against the argument that the Bank of Canada’s benchmark rate is tethered to the Fed’s because a weaker currency means inflation in imported goods. 

“We don’t deny that a weaker C$ boosts import prices but the pass-through to consumer prices is smaller than widely appreciated,” they wrote, adding that the central bank’s research and model suggested that a 10% loonie shock might add 25 to 30 basis points to core inflation. 

Recent episodes of Canadian dollar weakness “haven’t coincided with outsized inflation either, outright or vis-à-vis the US,” Schleich and Lovely said. 

A larger Bank of Canada-Fed policy rate gap than the current 50 basis points isn’t uncommon, they said. Nearly a quarter of the time since 1995, the Canadian central bank has set its policy rate more than 50 basis points below the Fed’s.

Their view implies that the Bank of Canada can easily cut its policy rate to 4.5% from the current 5%, even if the Fed stands pat. 

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Governor Tiff Macklem told House of Commons finance committee that Canada can chart its own rate path.

“Because we have our own currency, because we have a flexible exchange rate, we can run our own monetary policy so our interest rates in Canada don’t need to be the same as the US rate or global rates,” he said Thursday, reiterating earlier comments. 

“But there’s a limit to how far they can diverge. We’re not close to that limit. We have the ability to run our own monetary policy geared to what Canadians need.” 

He also said that once interest-rate cuts begin, they will happen “on a pretty gradual path,” repeating messaging in the recent summary of deliberations of its April 10 decision. 

That suggests a first cut may not immediately be followed by another until policymakers are convinced they’re on a path to the 2% inflation target. The rate of inflation was 2.9% in March. 

--With assistance from Jay Zhao-Murray.

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