MNI STATE OF PLAY: BOC Says Will Start on Path of Rate Hikes

The Bank of Canada will move to a series of rate increases starting perhaps in March to keep inflation expectations in check, while defying some market bets on Wednesday for an immediate hike with Governor Tiff Macklem speaking of the need for deliberate steps at a time of risk from Omicron.

"A path is not one move, a path is a number of steps. Secondly, a path doesn’t mean we’re on autopilot, it’s not automatic, and we will be assessing at each meeting," he said, "and a path doesn’t rule out that you would take a few steps and then we might pause and assess progress.”

Market trading before the decision showed a hike was seen as more likely and economists were split with 11 surveyed by MNI seeing a hold and 10 seeing a quarter-point increase. Some economists before the report also saw perhaps four increases this year, and many stuck with that view afterwards including the slower start to the cycle.

While inflation is "uncomfortably high," Macklem maintained long-term expectations are under control even with his own survey of firms showing two-thirds of executives see prices topping the Bank's 1%-3% target band for two years. Inflation of 4.8% through December is the fastest since Canada adopted inflation targets in 1991 and the Bank projects it will hold around 5% in the first half and supply bottlenecks will persist most of this year.

SLIMMING THE BALANCE SHEET

Macklem anticipated measured steps for QE as well, continuing the "reinvestment" phase at least until rates climb and saying there is no active consideration of outright asset sales. The Bank could allow "quantitative tightening" at some point, such as a roll-off of maturing assets, the Governor said.

Inflation is being driven by global pressures that should be resolved along with the pandemic, Macklem said when asked by MNI about price expectations. Price gains will also ease through the recovery as consumers rebalance spending back towards services from buying goods, he said, and higher interest rates will curb demand growth.

While holding rates risks inflation being away from the Bank's 2% target even longer, and may stoke an overheated housing market, it keeps monetary stimulus in close harmony with Prime Minister Justin Trudeau's pledge for fiscal support to continue until the pandemic is clearly dealt with.

The Bank on Wednesday dropped guidance for holding near-zero rates until April as predicted in some MNI reporting, and said the economy has restored full output sooner than thought.

"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," Macklem said.

"While reopening our economy after repeated waves of the COVID-19 pandemic is complicated, Canadians can be confident that the Bank of Canada will control inflation."