(Bloomberg) -- The Bank of Canada is limited in how much its interest rate increases can lag behind those of the Federal Reserve, with the gap threatening to weaken its currency and fuel inflation, according to an economist at Bank of Nova Scotia.

Most Read from Bloomberg

• Singapore PM Lee’s Estranged Brother Weighs Presidential Run

• Amazon Is Closing Its Cashierless Stores in NYC, San Francisco and Seattle

• Americans Need to Be Richer Than Ever to Buy Their First Home

• Amazon Pauses Construction on Second Headquarters in Virginia as It Cuts Jobs

• Russia Is Getting Around Sanctions to Secure Supply of Key Chips for War

Canada’s central bank was able to tighten less than the Fed in previous cycles when core inflation north of the border was cooler — but that’s not the case right now, Derek Holt, head of capital markets economics, said in a note dated March 3. In Canada, inflation is still too hot, inflationary expectations are on the rise and the weakening loonie is flashing warning signs, he said.

“The magnitude of the policy rate deviation between the Fed and the BoC relative to differences in their macroeconomic circumstances makes me concerned about the extent to which it is assumed the BoC can fall behind the Fed,” Holt said.

The loonie has fallen to about $1.36 as of Friday, compared with $1.34 when Bank of Canada Governor Tiff Macklem declared a conditional pause in its rate hiking campaign. The bank is expected to hold its overnight rate at 4.5% in a decision to be released on Wednesday.

Most Read from Bloomberg Businessweek

• Yellowstone Backers Wanted to Cash Out—Then the Streaming Bubble Burst

• FBI Documents Show Leonardo DiCaprio, Kim Kardashian Grilled for 1MDB Secrets

• Female Execs Are Exhausted, Frustrated and Heading for the Exits

• How Countries Leading on Early Years of Child Care Get It Right

• Microsoft Expands Game Pass as Regulators Fret Over Activision Deal

©2023 Bloomberg L.P.