BoC says there's a limit to how far US and Canada rates can diverge

OTTAWA (Reuters) - There is a limit to how far U.S. and Canadian interest rates can diverge but "certainly we're not close to that limit", Bank of Canada Governor Tiff Macklem told the House of Commons finance committee on Thursday.

Macklem reiterated that the central bank was waiting to see whether recent drops in underlying inflation would be sustained before starting to cut rates from a 23-year high of 5%.

Money markets see a more than 50% chance of a rate cut in June and have fully priced in a cut by September.

But in the United States, by far Canada's largest trading partner, the Federal Reserve on Wednesday highlighted recent disappointing inflation readings that could ensure rate cuts south of the border come at a slower pace.

"We can run our own monetary policy so our interest rates in Canada don't need to be the same as the U.S. rate or global rates," Macklem said.

"But there is a limit to how far they can diverge. We're certainly not close to that limit."

Macklem reiterated that tighter monetary policy was having more of an impact in Canada than in the United States, given higher rates of household debt and the fact that most mortgages in Canada have to be renewed every five years.

Inflation is currently at 2.9% - still well above the central bank's 2% target - and is likely to stay at around that level for several months, in part due to higher gasoline prices, Macklem added.

(Reporting by David Ljunggren and Promit Mukherjee, Editing by Franklin Paul)