Despite soaring inflation, the Bank of Canada opted to hold off on rate hikes until later in the spring, keeping its benchmark interest rate at 0.25 per cent.
In a closely watched move that will have a ripple effect on the nation’s housing market, Canada’s central bank decided against its first rate hike since October 2018. However, it laid the groundwork for a monetary tightening cycle to begin following nearly two years of rock-bottom rates.
“With overall economic slack now absorbed, the Bank has removed its exceptional forward guidance on its policy interest rate,” said the Bank of Canada in a release.
Interest rate hikes were anticipated after data released in December confirmed that inflation had reached a 30-year high, with the Consumer Price Index (CPI) hitting 4.8 per cent.
“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 five per cent in the first half of 2022,” the release said. “As supply shortages diminish, inflation is expected to decline reasonably quickly to about three per cent by the end of this year and then gradually ease towards the target over the projection period.”
Canada’s economy has rebounded strongly from the COVID-19 crisis and employment numbers have nearly recovered to pre-pandemic levels. However, uncertainty over the Omicron variant and resulting lockdowns in Ontario and Quebec altered the Bank of Canada’s outlook heading into 2022.
“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 two per cent inflation target,” the release said.
Investors expect as many as six rate hikes this year, which would lift the policy rate to its pre-pandemic level of 1.75 per cent. The Bank of Canada hasn’t had a policy rate higher than 1.75 per cent since before the 2008 financial crisis.
The next announcement for the Bank of Canada’s overnight rate target will take place on March 2, 2022.
