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MNI STATE OF PLAY: Canada Seen On Path To April Rate Increase

OTTAWA (MNI)

Wednesday's decision laid out inflation risks and strong economic momentum.

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The Bank of Canada is seen remaining on course to raise interest rates by April after its decision Wednesday added marginal language about strong inflation and economic growth while pointing to limited downside risk from the omicron variant.

The statement affirmed previous guidance for hiking the 0.25% policy rate in the middle quarters of next year when inflation stabilizes around 2% and the economy restores full output, which investors already saw as likely meaning an April move.

Inflation is "elevated" and supply disruptions "will likely take some time to work their way through" the Bank said. Policy makers reiterated they are watching expectations to ensure price gains don't become "embedded," and removed a prior line saying some of the pressure was temporary.

Those views were balanced by the Bank's first major comments on omicron, saying along with recent floods in British Columbia it "could weigh on growth by compounding supply chain disruptions." That risk comes against the BOC noting "considerable momentum" into the fourth quarter.

MANDATE RENEWAL STILL PENDING

“Given the ongoing heat in inflation, a near-complete recovery in employment markets, torrid housing, and a well-behaved currency, April does now indeed look like the lift-off date for rate hikes,” Bank of Montreal chief economist Doug Porter said in a research note.

Analysts at TD, RBC, Capital Economics, Desjardins and CIBC also see an April move, while bankers' acceptance trading shows some bets on a move sooner and perhaps 150bps of hikes in 2022.

More signals could come on Thursday with Deputy Governor Toni Gravelle giving a speech and press conference starting at 2pm EST. The BOC is also due to renew a five-year inflation targeting agreement with the government this month, and one window is Finance Minister Chrystia Freeland's Dec. 14 fiscal update. Opposition politicians and sources have told MNI sticking to the 2% target is best given the challenge of pulling it down from the fastest pace since 2003 at 4.7%.

The decision also gave no new information on the future of the "reinvestment" phase of QE that's now holding the balance sheet at CAD500 billion, four times its pre-pandemic size.