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Bank of Canada Governor Tiff Macklem
By Adrian Wyld/Canadian Press/Bloomberg via Getty Images

Bank of Canada Sticks to Rate-Hike Forecast of April at the Earliest

Despite bond markets predicting interest rate hikes as early as the first quarter of 2022, the Bank of Canada today stuck to its script that rates should remain low until the “middle quarters” of next year.

This suggests the first BoC rate hike will come anytime between April and September, although odds are currently pointing to earlier rather than later.

The economy continues to require “considerable monetary policy support” due to excess capacity, the Bank said following its interest rate decision Wednesday morning, in which it left its overnight target rate at 0.25%, where it’s been since March 2020.

Recent economic indicators suggest the economy had considerable momentum into the fourth quarter… [but] the devastating floods in British Columbia and uncertainties arising from the Omicron variant could weigh on growth by compounding supply chain disruptions and reducing demand for some services.”

The Bank said it remains committed to holding the policy rate in place “until economic slack is absorbed” to achieve 2% inflation, which the Bank sees happening “sometime in the middle quarters” of 2022.

“On balance, the overall tone of the statement reads like they are leaving their options open into the next forecast assessment in January,” wrote Scotiabank economist Derek Holt.

“…the segment of market opinion that thought the BoC would embrace a more hawkish pivot by more explicitly setting up a January hike was surprised by [today’s statement],” he added. “On net, that means the statement was taken as dovish only relative to market pricing that had been getting carried away and was proving to be rather inflexible in light of the omicron variant.”

BoC Monitoring Elevated Inflation

The Bank noted that CPI inflation remains elevated, impacted in part by global supply constraints.

The Bank is closely watching inflation expectations and labour costs to ensure that the forces pushing up prices do not become embedded in ongoing inflation,” read the statement.

The Bank used this line verbatim in October with the only distinction being it had previously characterized the forces pushing up prices as ‘temporary,'” analysts with National Bank of Canada wrote.

[Regarding] inflationary pressures, the narrative was broadly the same, though there were some subtle changes of note. On balance, these changes were slightly more hawkish. But in any case, we still feel the Bank is downplaying the inflation backdrop.”

March Rate Hike Still on the Table, Observers Say

While the Bank of Canada has repeated that it doesn’t expect to start lifting interest rates until mid-2022—or April at the earliest—markets continue to believe the Bank will be forced to hike rates earlier to keep inflation under control.

Even after the rate decision announcement, markets remained fully priced in for the first quarter-point rate hike to take place in March (there’s no meeting scheduled for February).

“Despite January appearing to be taken off the table today, we are maintaining our call that the Bank will implement its first rate hike in March 2022 (assuming the Omicron variant isn’t as disruptive as some fear),” NBC’s economics team noted. “If that is the case, we might see the Bank tee it up at its January meeting in seven weeks’ time.”

Analysts from the Big 6 Banks expect anywhere from two to four quarter-point rate hikes in 2022, while bond markets expect nearly 125 basis points (bps) of rate tightening by year-end 2022.

Looking out to 2023, the big banks expect up to three additional rate hikes, with Scotiabank as the outlier, forecasting a target rate of 2.25% by the end of 2023.

Feature image by Adrian Wyld/Canadian Press/Bloomberg via Getty Images