The Bank of Canada kept the overnight rate at 0.25% and states it is continuing its reinvestment phase by keeping its holdings of Government of Canada bond roughly constant. As for forward guidance, the Bank said it remained committed to holding the policy rate at the effective lower bound until economic slack is absorbed, and the 2 percent inflation target is sustainably achieved. In the October Monetary Policy Report, this occurred in the middle quarters of 2022. The Bank did not update this view in today’s announcement.
In terms of the economic outlook, the Bank noted that the economy had considerable momentum heading into the fourth quarter. Employment growth has been strong recently, and wage growth is picking up. However, the extreme weather in B.C. and the Omicron variant could weaken growth in the near-term.
With regards to inflation, the Bank acknowledged that consumer price inflation remains elevated partly due to global supply constraints. The Bank expects inflation to remain high in the first half of 2022 before easing to 2 percent in the second half of the year. Inflation expectations and labour costs are being closely monitored by the central bank, so as to ensure “forces pushing up prices do not become embedded in ongoing inflation”.
Key Implications
The Bank of Canada mostly kept its communication unchanged from the October Monetary Policy Report today. Today’s announcement showed that despite recent gains in the labour market, the Bank is sticking to its forward guidance from October, partly perhaps as a result of the uncertainty created by the Omicron variant.
If Omicron proves to be less of a health concern than initially feared, especially for vaccinated individuals, the Bank could change its messaging in the near future. Indeed, with inflation running hot, and the labour market on solid footing, there is room to reduce monetary policy support.
