(Bloomberg) – The Bank of Canada left borrowing costs unchanged, but highlighted strength in the labor market and concerns about persistent inflation likely to keep expectations of an impending interest rate hike intact.
Most Read From Bloomberg
In a decision released only on Wednesday, policymakers led by Governor Teff McClimm left the benchmark interest rate unchanged at 0.25% and emphasized that the economy still needed significant monetary policy support.
However, officials dropped an indication that inflationary pressures are temporary and noted that recent job gains have been broad-based, with the employment rate returning to pre-pandemic levels.
While the language changes from the previous decision were gradual, there is nothing in the statement likely to derail investors’ expectations that the Bank of Canada is about to embark on an aggressive rate hike campaign.
According to the statement, inflation is high and the impact of global supply constraints is feeding on a broader spectrum of commodity prices, adding that “recent economic indicators indicate that the economy had significant momentum in the fourth quarter.”
The Bank of Canada is leading the way among the Group of Seven central banks in slowing stimulus efforts.
In October, it ended its bond-buying stimulus program and accelerated the potential timing of a future interest rate hike amid concerns that supply disruptions are driving up inflation. Markets are pricing Canada’s rate hike next year at a faster pace than the Federal Reserve, which has yet to end its quantitative easing program.
Before Wednesday, investors were seeking five Canadian hikes next year, with more than a 50% chance of a first rally by January. The precautionary decision was expected by all 22 economists surveyed by Bloomberg News. Markets estimated the chances of a price hike this week at around 20%.
Canadian yields slipped at the front end of the curve on the news, with two-year yields down nearly five basis points to 1.09%. The Canadian dollar briefly reversed its earlier gains before regaining some ground to trade near where it was before the decision.
At least one rate hike was estimated by the Bank of Canada’s March 2 decision. Some analysts predicted that the central bank would hint strongly at a rate hike in its next decision in late January, which did not materialize. This prompted investors to reduce their bullish bets next month.
Simon Harvey, Senior FX Market Analyst at Monex Europe Ltd. , via email, said the decision was “a bit tough, but not binding.”
What Bloomberg Says About Economics…
“We continue to expect a slow approach as the pandemic fades, subject to inflation developments. Our baseline is still off in April and a total of three hikes next year, each of 25 basis points.”
– Andrew Hosby, Economist
For the full analysis, click here
However, it is becoming increasingly difficult for the central bank to keep the excessive easing policy in place.
A report due next week from Statistics Canada may show that inflation reached a three-decade high in November at around 5%. The unemployment rate is near its lowest level in five decades. Employers are struggling to fill jobs, and wage pressures are mounting. In the meantime, housing prices rose dramatically.
In the statement, policymakers cited all of these developments in their assessment of the Canadian economy.
Restricting the central bank’s ability to act is a commitment not to raise interest rates until the recovery is complete – something officials predicted in October would not happen until the “middle quarters” of 2022. That means April at the earliest, although new forecasts will be released in January ( January), which could give the central bank more room to act earlier.
McClem also pledged not to sell the central bank’s holdings of Canadian government bonds until at least the rate-raising cycle begins.
In its assessment of the global economy, the central bank said on Wednesday that it is still seeing a recovery in activity, with inflation rising in many countries as strong demand comes in against supply disruptions. However, the omicron variant has “led to renewed uncertainty” in the global economic picture.
The emergence of the omicron variant, along with the recent floods in British Columbia, may have an ‘impact on growth’.
However, there have been some subtle changes around the language regarding inflation. The central bank said the effects of global supply restrictions “will likely take some time to work their way around, given the backlog of existing supplies”. They said they still expect inflation to remain high in the first half of 2022, before declining around 2% in the second half of the year.
“The bank is closely monitoring inflation expectations and labor costs to ensure that the forces driving prices higher are not affected by persistent inflation,” officials said. A similar ruling in the October statement described these forces as temporary.
(Updates with market forecast all the time.)
Most Read Bloomberg Businessweek
© 2021 Bloomberg LB