Bank of Canada Rate Steady for Now, but Increases Coming

Maybe not today, but the Bank of Canada’s days of holding its key overnight lending rate at a historic low are at an end.

In a much-anticipated rate announcement Wednesday, the Bank surprised analysts who were expecting an uptick by holding its lending rate unchanged at 0.25%. However, the Bank also clearly signaled that higher rates are on the way to help dampen rising inflation.

“Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target,” the Bank said in a statement this morning.

The Bank admitted that supply constraints - along with higher food and energy prices – will likely keep inflation near the 5% mark through the first half of this year. But 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 Bank’s 2% target over the projection period, it said.

“Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target,” the Bank said.

Statistics Canada reported the Canadian inflation rate at 4.8% in December, the highest in 30 years and sparking further speculation the Bank would begin to bump rates higher today to help bring inflation lower.

The Bank’s lending rate was dropped sharply in the early days of the COVID-19 pandemic as the Canadian and global economy tanked amid widespread lockdowns. And while the Bank acknowledged in today’s statement that domestic economic indicators are promising, including strong employment growth, a tightening labour market and rising wages, it also warned the global recovery has been ‘uneven’ and that the Omicron variant is weighing on first quarter activity.

After GDP growth of 4½% in 2021, the Bank said it expects Canada’s economy to grow by 4% in 2022 and about 3½% in 2023.

Source: DePutter Publishing Ltd.

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