Borrowing costs

Bank of Canada keeps borrowing costs unchanged | News from banks

The Bank of Canada kept borrowing costs unchanged, but highlighted the strength of the labor market and concerns about continued inflation that will likely keep expectations of impending interest rate hikes intact.

In a statement-only decision on Wednesday, policymakers led by Governor Tiff Macklem left the overnight key rate unchanged at 0.25% and reiterated that the economy continues to need considerable support from monetary policy.

Still, officials dropped reference to temporary inflationary pressures and noted that recent job gains were widespread, with the employment rate returning to pre-pandemic levels.

While the language changes from the previous ruling were gradual, nothing in the statement is likely to derail investor expectations that the Bank of Canada is about to embark on an aggressive hike campaign. rate.

“Inflation is high and the impact of global supply constraints is spilling over into a wider range of prices for goods,” the statement said, adding that “recent economic indicators suggest the economy has experienced momentum. considerable in the fourth quarter “.

The Bank of Canada is at the forefront of the Group of Seven central banks in slowing its stimulus efforts.

In October, it ended its stimulus program to buy bonds and accelerated the potential timing of future rate hikes amid fears that supply disruptions could push inflation up. Markets are anticipating rate hikes in Canada next year at a faster pace than the Federal Reserve, which has yet to end its quantitative easing program.

Before Wednesday, investors were forecasting five Canadian increases next year, with a more than 50% chance of a first hike by January. The stand-pat decision was expected by the 22 economists polled by Bloomberg News. The markets had put the odds of a rise this week at around 20%.

Canadian rates at the end of the curve fell on the news, with two-year rates sliding about five basis points to 1.09%. The loonie briefly reversed its earlier gains before regaining some ground to trade near where it was before the decision.

At least one rate hike made by the Bank of Canada’s March 2 decision is fully reflected. Some analysts had speculated that the central bank would strongly allude to a rate hike in its next decision at the end of January, which did not materialize. This prompted investors to reduce bets on a hike next month.

The move was “slightly hawkish, but without commitment,” Simon Harvey, senior currency analyst at Monex Europe Ltd. said by email.

However, it is becoming increasingly difficult for the central bank to maintain an ultra-accommodating policy in place.

A Statistics Canada report due next week could show inflation hit a three-decade high in November of around 5%. The unemployment rate is near its lowest level in five decades. Employers are struggling to fill positions and wage pressures are mounting. House prices, meanwhile, have skyrocketed.

In the statement, policymakers cited all of these developments in their assessment of the Canadian economy.

Limiting the central bank’s ability to move is a pledge not to raise interest rates until the recovery is complete – something officials predicted in October would not happen until the “middle quarters” by 2022. That means April at the earliest, although new projections will be released in January, which could give the central bank more leeway to act sooner.

Macklem also pledged not to sell the central bank’s holdings of Canadian government bonds until at least the start of the rate hike cycle.

In its assessment of the global economy, the central bank said on Wednesday it continued to see activity pick up, with inflation rising in many countries as strong demand collides with supply disruptions. The omicron variant, however, has “injected new uncertainty” into the global economic situation.

The emergence of the omicron variant, as well as the recent flooding in British Columbia, could also “weigh on growth.”

However, there have been some nuanced changes around the wording on inflation. The central bank said the effects of global supply constraints “are likely to take some time to be felt, given existing supply backlogs.” They said they continued to expect inflation to remain high in the first half of 2022, before falling back to 2% in the second half.

“The bank is closely monitoring inflation expectations and labor costs to ensure that the forces that push up prices do not become part of ongoing inflation,” officials said. A similar sentence in the October statement described these forces as temporary.