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The Bank of Canada may move to hike rates before the U.S. Federal Reserve Board, but it has cause to be cautious on the magnitude of its moves, suggests National Bank Financial Inc. (NBF) in a new report.

As it stands, inflation is already “far beyond” the level that has touched off previous rate tightening cycles, the report noted.

However, there are several factors weighing against aggressive rate hikes, including labour market uncertainty, high household debt levels and the interest rate sensitivity of demand.

“Relative rate exposure is near a record level and more extreme than in the U.S., reflecting Canada’s outsized reliance on housing,” NBF said.

Similarly, high household debt levels indicate that higher rates could quickly slow the economy.

“With a heavier household debt burden in Canada, a given amount of tightening should exert a greater dampening effect north of the border than in the U.S.,” it said.

So, while the Bank of Canada could hike rates first, it may not go as far as the Fed, the report noted.

“The BoC may move first but won’t necessarily outgun the Fed when all is said and done,” it said.

There remain a number of risks to the outlook, it noted, including the ongoing effects of the pandemic, the trajectory for employment and inflation, and the evolution of fiscal policy in both Canada and the U.S.