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Governor Macklem sees strong economic momentum, elevated inflation, omicron risks.
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The Bank of Canada on Wednesday affirmed its guidance for raising interest rates in the middle quarters of next year with inflation elevated through the first half and economic growth showing considerable momentum though the omicron Covid variant poses a risk.
"The economy continues to require considerable monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s October projection, this happens sometime in the middle quarters of 2022," Governing Council led by Tiff Macklem said in a phrase that echoed the last meeting.
The benchmark rate on overnight loans between commercial banks remained at a record low 0.25% and QE will continue along the reinvestment phase announced in October. Investors expected no rate change and QE holding the balance sheet at four times its normal size at CAD500 billion. Some watched for signals a rate increase could come by April or potentially even before that.
Inflation is "elevated" and supply disruptions "will likely take some time to work their way through" the Bank said. The return of CPI towards 2% was tweaked to the second half of 2022 from the previous view of "by late 2022." Policy makers reiterated they are watching expectations to ensure price gains don't become "embedded." Inflation has increased further in many countries, the BOC said.
Those views were balanced by the Bank's first major comments on omicron, saying it has boosted global uncertainty and lowered oil prices. In Canada the variant along with recent floods in British Columbia "could weigh on growth by compounding supply chain disruptions," the Bank said. That risk comes against a strong economic backdrop, with the BOC noting broad job gains in recent months and other signs "the economy had considerable momentum into the fourth quarter." GDP remains 1.5% below its pre-pandemic mark.
Macklem is facing one of the biggest tests of inflation targeting since it was brought in three decades ago. Consumer prices are rising the fastest since 2003 at 4.7%, more than double the Bank’s 2% goal and outside the 1%-3% target band for seven months. Any further uptick would make it the quickest pace since 1991. The adoption of targets saw inflation slide from well over 5% to about 1% by the middle of 1992, which could limit how much rates need to climb now.