The Bank of Canada kept the overnight rate at 0.25% and stated that it will continue the reinvestment phase of its balance sheet by maintaining its holdings of Government of Canada bonds.
On the economic outlook, the Bank noted that “GDP growth in the second half of 2021 now looks to have been even stronger than expected. The economy entered 2022 with considerable momentum, and a broad set of measures are now indicating that economic slack is absorbed. With strong employment growth, the labour market has tightened significantly. Job vacancies are elevated, hiring intentions are strong, and wage gains are picking up.”
On the impact of omicron, the BoC stated, “it is expected to be less severe than previous waves. Economic growth is then expected to bounce back and remain robust over the projection horizon, led by consumer spending on services, and supported by strength in exports and business investment.”
The Bank acknowledged the high level of consumer price inflation, stating that “persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period.”
Key Implications
This was always going to be a close call. Markets were priced for a hike, but the BoC decided it needed to move in a methodical fashion. It did this by stating that overall slack caused by the pandemic has now been absorbed and that it would end its exceptional level of forward guidance. In other words, it is now ready to hike.
Even with growth being impacted by omicron, inflation should be the main concern for the Bank. Consumer prices are growing at 5% and financial imbalances (housing) continue to rise on the back of low interest rates. From our lens, the BoC needs to move quick. We expect a rate hike in March and three more in 2022. This should lift government bond yields and mortgage rates. Hopefully this will cool some of the froth.
Canada 2-year and 10-year yields are down 7 basis points and 10 basis points, to 1.17% and 1.77%, respectively. The loonie is flat at 79 U.S. cents. With the Fed on deck to make its interest rate announcement at 2pm today, we could see some spillover into Canadian markets.
