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The Bank of Canada held its key lending rate at a record low 0.25% Wednesday, resisting market calls for a hike to tackle hot inflation, with Governor Tiff Macklem instead dropping forward guidance hinting at steady policy to say rates will rise as it seeks to prevent price gains from becoming entrenched.
"While COVID-19 continues to affect economic activity unevenly across sectors, the Governing Council judges that overall slack in the economy is absorbed," Macklem said in a statement, and he holds a press conference at 11am EST. "Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target." Before today's decision, some economists saw four rate hikes this year.
Economists were split on a hike or hold Wednesday, with more bets shifting to a hike in the last two weeks as CPI of 4.8% reached the highest since inflation targets were adopted in 1991 and businesses saw gains outside the Bank's 1-3% target band for the next two years.
The decision to hold rates has risks. Former Governor Stephen Poloz last week called inflation the top economic problem, price gains have topped the Bank's target band for nine months, expectations have surged and cheap credit will feed an overheated housing market. Policymakers said Wednesday that supply bottlenecks will linger through this year, the Monetary Policy Report raised the 2022 inflation forecast to 4.2% from estimates of 3.4% in October and 2.4% in July. Inflation was seen at 3% by yearend.
"The upside risks are of greater concern. Until inflation moves significantly lower, there is an elevated risk that Canadians will start to believe that inflation will stay high over the long term," the Bank's economic forecast paper said.
Still, hiking today would have put Macklem at odds with Prime Minister Justin Trudeau's commitment to keep fiscal stimulus flowing until the pandemic is clearly dealt with, and omicron has again overwhelmed hospitals and set infection records.
The BOC's last decision saw tightening in the "middle quarters" of 2022 when the economy reached full output and inflation was sustainably at 2%. The central bank has also been buying CAD4-5 billion a month of government bonds in a "reinvestment" phase of QE and said that would continue at least until rates rose. "At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds."
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.