OTTAWA – The Bank of Canada is keeping its key interest rate target on hold at 0.25 per cent, but warning it won’t stay there for much longer.
The trendsetting rate has been at its rock-bottom level since March 2020 during the first wave of the COVID-19 pandemic as the economy went into a downturn and three million jobs were lost.
The central bank said Wednesday the rebound since then and especially over the last few months has been stronger than it anticipated.
In a statement, the bank’s senior decision-makers said the economy is running at capacity, including a labour market that is by most standards back at pre-pandemic levels.
The rebound is why it now says it will no longer promise to keep its key policy rate at 0.25 per cent, adding that rates will need to rise to bring inflation back to the central bank’s two per cent target.
“Interest rates will need to increase to control inflation. Canadians should expect a rising path for interest rates,” Bank of Canada governor Tiff Macklem said in a statement.
He also pointed to the rapid spread of the Omicron variant as an economic “wild card” at home and abroad to explain why the bank held off on hiking rates Wednesday.
“Our approach to monetary policy throughout the pandemic has been deliberate, and we were mindful that the rapid spread of Omicron will dampen spending in the first quarter. So we decided to keep our policy rate unchanged today, remove our commitment to hold it at its floor, and signal that rates can be expected to increase going forward,” Macklem said.
CIBC chief economist Avery Shenfeld said he expects the Bank of Canada to raise rates in March if the country gets better news about the Omicron variant.
The central bank didn’t outline the timing or pace of increases in its statement, but the decision to hold off on a first hike will be controversial in financial markets at a time when headline inflation is at a 30-year high, says Stephen Tapp, chief economist at the Canadian Chamber of Commerce.
The Bank of Canada warned in its updated economic outlook that inflation rates are likely to creep above five per cent for the first quarter before easing by the end of the year.
The pace of price growth is then expected to ease by the end of 2022, but inflation for the entire year is forecasted to clock in at 4.2 per cent, up from the 3.4 per cent the bank forecasted in October.
Surveys from the Bank of Canada suggest Canadians are now expecting inflation rates to remain higher for longer.
The longer inflation rates stay high, the more likely Canadians will believe they will stay elevated over the long-term, which the bank worries could lead to runaway price growth.
Bank of Canada maintains policy rate, removes exceptional forward guidance #economy #cdnecon https://t.co/dMAesjfUkB
— Bank of Canada (@bankofcanada) January 26, 2022
In the rate announcement, the bank said it will use its policy tools to ensure “near-term inflation expectations do not become embedded in ongoing inflation.”
The central bank estimates the economy grew by 4.6 per cent in 2021, down half a percentage point from its previous forecast in October, and now projects growth in real gross domestic product in 2022 at four per cent, down from 4.3 per cent.
The Bank of Canada said part of the downgrade this year is due to the impact of Omicron, hints from governments that spending is easing earlier than expected, and supply chain issues that will have “larger and more broad-based negative implications on economic activity” this year.
The bank said the possibility of more variants in the future renewing restrictions here and abroad also cloud the outlook.
BREAKING: @bankofcanada defies market expectations, holding its key rate at a record low 0.25%. Many say rates have no business near 0% with a 30yr high in core inflation & worsening inflation expectations. The market is now pricing in a 75% chance of a hike March 2.
— Rob McLister (@RobMcLister) January 26, 2022
Dovish surprise from the Bank of Canada — almost everyone saw a rate hike today, none forthcoming. The Fed next?#RosenbergResearch #TheFed #Inflation
— David Rosenberg (@EconguyRosie) January 26, 2022
#BankofCanada not raising rates today is a bigger surprise than if they actually did raise rates. Canada is now set-up for a significant event.
— IceCap (@IceCapGlobal) January 26, 2022
Bank of Canada its raises inflation target to 4.2% for 2022 and it holds interest rate at 0.25%… what a time to be alive…
— Mortimer (@mortimer_1) January 26, 2022
Bank of Canada states inflation caused by pandemic and shutdowns – no mention of 0% rates or QE.
— IceCap (@IceCapGlobal) January 26, 2022
“Overall the banks view is that the most important thing that will restore balance to the housing market in Canada is an increase in supply. Supply has not kept pace with demand.” – Don’t look at us, BoC’s Deputy Gov. Rogers.
— Steve Saretsky (@SteveSaretsky) January 26, 2022
BANK OF CANADA GOVERNOR: INFLATION IS UNCOMFORTABLY HIGH
BANK OF CANADA GOVERNOR: RATE HIKES WON’T BE AUTOMATIC, WILL TAKE DECISIONS AT EACH MEETING
— *Walter Bloomberg (@DeItaone) January 26, 2022
The Bank of Canada “will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds” once it beings rising rates.
— zerohedge (@zerohedge) January 26, 2022
Last week, I asked Desjardins chief economist Jimmy Jean why he didn’t expect the Bank of Canada to hike rates today. He was right on the money. pic.twitter.com/IDb8PcabIe
— Matt Lundy 📈🖊️ (@mattlundy33) January 26, 2022
1 BMO: We don’t believe that today’s #BankofCanada decision to hold steady at all deflects from the fact that rates are going higher in a relatively forceful fashion this year. This specific decision was likely driven by the fact that …#BOC #cdnecon #interestrates pic.twitter.com/Uiy33TV2rC
— Don Curren (@dbcurren) January 26, 2022
3 BMO: We believe this was a prudent decision, even as we see the need for higher rates (and with pace) as much as any forecaster. Assuming restrictions begin to lighten in the weeks ahead, prepare for #ratehikes just five weeks from today.#BOC #cdnecon #monetarypolicy
— Don Curren (@dbcurren) January 26, 2022
BoC: “Increases in food prices will likely continue. Bank of Canada expects that food price inflation will be above its historical average over 2022.”
— Dima (@dima_nomad) January 26, 2022
Paging the #BankofCanada. #cdnecon. #oil #inflation #oott #monetarypolicy https://t.co/OIDJVDjam3
— Brett House (@BrettEHouse) January 26, 2022
BOC’S GOV. MACKLEM: WE RAN A SIMULATION IN WHICH GLOBAL GOODS PRICES PLUMMETED BY 30%, BRINGING INFLATION TO JUST UNDER 2% NEXT YEAR.
— Breaking.Live (@BreakingLive_) January 26, 2022
I guess we really shouldn’t be surprised that the Bank of Canada didn’t move today: December’s announcement held the forward guidance in place.
For forward guidance to be effective, it has to be credble. And to be credible, you have to do what you’ll say you’ll do.
— Stephen Gordon (@stephenfgordon) January 26, 2022
OTOH, the Bank also knew that there’d be 2 CPI releases before the next rate announcement. Now it has to play catch-up.
— Stephen Gordon (@stephenfgordon) January 26, 2022
If the Bank of Canada is held responsible for making sure that RE speculators avoid feeling any pain at all, we’re all doomed. https://t.co/aec5LF7LrR
— Hilliard MacBeth CIM FCSI® (@hmacbe) January 25, 2022
Two very important graphs from the Bank of Canada this morning. More here: https://t.co/Vxc6hLg5q9 pic.twitter.com/efbLSEEMi5
— Trevor Tombe (@trevortombe) January 26, 2022
After some whipsawing in OIS, implied BoC rate hike odds (Bloomberg's model) haven't changed much from yesterday – still at least six moves priced in over the remainder of the year: pic.twitter.com/D0Bgmtd0lK
— Karl Schamotta (@vsualst) January 26, 2022