Bank of Canada shows ready for a series of rate hikes

Inflation is expected to continue and is not expected to approach the target of 2% by the second half of 2023.

News analysis

The Bank of Canada That gave the market a little surprise Did not raise He said the special COVID-19 support period is over and multiple interest rate hikes are coming.

Bank of Canada Governor Tiff McClem The central bank said it has taken a very cautious approach in shifting monetary policy from providing emergency stimuli to one of interest rate hikes.

“Interest rates are now on the rise. We have decided that this is a major change in monetary policy and that it is appropriate to move forward in a deliberate series of steps,” McClem said. Opening statement At a BoC press conference.

However, as Omicron weakened the economy in the first quarter, the BoC decided to keep interest rates unchanged for the foreseeable future.

The Bank of Canada is very sensitive to public opinion, said Ian Lee, a business professor at Carleton University, who was “surprised but not shocked” by the BoC’s failure to raise interest rates on January 26. Stated.

“They didn’t want to see interest rates rising when the Omicron pandemic was still going on, so they thought,” Oh, well, we just put it off. ” I think it was, “he told the Epoch Times.

The central bank has given a clear signal that no special pandemic measures are needed anymore.thiss is “economic slack [is] It is now essentially absorbed, “he said, and the board has decided to” end its extraordinary commitment to keep the policy rate at an effective lower limit. “

Inflation sustainability

Macklem said the risks surrounding BoC’s inflation forecast are “reasonably balanced,” but central banks are more concerned about upside risks than downside risks.

The Bank of Canada forecasts inflation in 2022 to average 4.2% (up from 3.4% in October) and 2.3% in 2023, which is no different from October.

According to the central bank’s quarterly, “under the assumption that oil prices are flat, the boost from rising gasoline prices should weaken in the coming quarters.” Monetary policy report, Released on January 26th. This assumes that West Texas Intermediate prices will remain at approximately $ 75 a barrel for the forecast period through the end of 2023.

However, WTI traded on January 26 at a seven-year high of $ 88 a barrel, boosted by Russia’s threat to Ukraine.

“Oil prices can skyrocket. On the other hand, if commodity prices have risen significantly in the past, it is not uncommon for those prices to actually reverse. We actually see a reversal. If so, inflation will fall faster, “McKrem said in response to a question from the Epoch Times.

The governor said that one of the scenarios where the price of goods could fall is in the transition to service, as the pandemic restrictions will be lifted and the economy will open up, for example, when restaurants and gyms return to full operation. I added that there is.

“Therefore, in that scenario, it’s not hard to imagine that commodity prices will actually reverse somewhat. Goods price reversals are not built into the forecast. Inflation is us when we include them in the forecast. Will go down faster than expected. “

Rising interest rates

Lee said businesses will be more affected than consumers when interest rates rise.

“A rate hike will have or will have an immediate impact on all operating loans,” Lee said. “Therefore, the impact is far more direct and much more universal to businesses than to consumers.”

Companies operating credit lines are usually associated with a prime rate at which the bank increases in sync with the central bank.

According to Lee, most consumer loans such as credit cards, mortgages and car loans have fixed interest rates, and some already have very high interest rates so that they are not affected by the BoC rate hike.

January 21 Angus Reid Poll It turns out that 57% of Canadians say it’s difficult to feed their households given the highest inflation rate in 30 years. Polls also show that debt is a major source of stress for one-quarter (24%) of Canadians, and rising interest rates have a significant negative impact on one-quarter (25%) of Canadians. I found.

Financial markets expected the Bank of China to raise interest rates more quickly, and as interest rates were not announced, the Canadian dollar fell sharply against the US dollar and bond yields fell.

The analysis depends on the number of rate hikes seen in 2022 and when the first rate hike will occur.

TD described the Bank of Canada’s move as a “hawkish hold.” “Today’s decision was surprising, but our belief that interest rates will reach 1.00% by mid-2022 remains unchanged,” TD said in a note to its clients.

But RBC says the Bank of Canada will be more measured by hiking rates.

Josh, senior economist at RBC, said, “We continue to believe that the market will hit highs with more than five rate hikes in 2022, and today’s BoC patience makes central banks overly aggressive in the pace of tightening. There is growing confidence that it is not. ” Not in the memo to the client.

Raising interest rates also increases the cost of debt that Canada’s households have abundantly.

Tony Stylo, director of Canadian economics at Oxford Economics, said in a note to clients, “Banks are cautious in raising interest rates to avoid exacerbating the underlying household debt and home price vulnerabilities. I continue to believe that we should take a good approach. “

Stillo expects banks to start raising rates in April and raise them two more times by the end of the year. But if Omicron passes faster than expected and is less harmful to the economy, the BoC could start raising interest rates in March, he added.

Lee points out that multiple rate hikes are expected in 2022, but even with four rate hikes, the central bank’s key policy rate remains at 1.25%, which is very low by historical standards. There is.

“We are in a very unusual and unprecedented time,” he said.

Rahul Vaidyanath


Rahul Vaidyanath is a journalist in The Epoch Times of Canada. His areas of expertise include economics, financial markets, China, and defense and security. He has worked at the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York and Los Angeles.