By Max Sato
(MaceNews) – The Bank of Canada on Wednesday left its record-low policy rate — the target for overnight lending rates — at 0.25%, as expected, to continue supporting economic recovery while sticking to its recent projection that a rate hike is likely to come sometime between April and September.
“The Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable monetary policy support,” the bank said in a statement. “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”
The BOC repeated its October projection that the economy would be ready for higher borrowing costs “sometime in the middle quarters of 2022.”
The bank vowed to “provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target.”
In its previous announcement on Oct. 27, the Governing Council said the bank was ending quantitative easing and moving into the reinvestment phase. It also moved up its projection for its first interest rate hike during the current cycle to “sometime in the middle quarters of 2022” from “the second half of 2022.”
Canada’s GDP Rebound Vs. Covid Uncertainty
“Recent economic indicators suggest the economy had considerable momentum into the fourth quarter,” the bank said Wednesday. “This includes broad-based job gains in recent months that have brought the employment rate essentially back to its pre-pandemic level.”
At the same time, the bank noted heightened uncertainty. “The new Omicron COVID-19 variant has prompted a tightening of travel restrictions in many countries and a decline in oil prices, and has injected renewed uncertainty,” it said.
Canada’s economy expanded a robust 1.3% on quarter, or an annualized 5.4%, in the July-September quarter after a slump in April-June, led by a rebound in private consumption on eased Covid restrictions. But the level of the gross domestic product was still below that of the pre-pandemic last quarter of 2019. GDP grew 0.8% in October.
“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.
Inflation To Remain High In 1H 2022
Global supply chain constraints led consumer inflation in Canada to surge 4.7% on year in October, up from a 4.4% rise in September and marking the largest gain since February 2003. It stayed well above the BOC’s 1%-to-3% control range.
The bank said it continues to expect CPI inflation to “remain elevated in the first half of 2022 and ease back towards 2 percent in the second half of the year.” The effects of these constraints on prices will “likely take some time” to work their way through, given existing supply backlogs, the bank projected.
In its latest quarterly Monetary Policy Report released in October, the BOC said the recent surge in consumer prices posed a greater risk to its effort to anchor inflation around 2% in its target range of 1% to 3%.
The bank projected in the report that the pandemic-caused supply constraints and higher energy costs would leave high inflation “for the rest of 2021 and into 2022,” revising up its forecast for consumer price increases to 3.4% for this year from 3.0% projected in July, and raising its 2022 forecast by a full percentage point to 3.4% from 2.4% made three months earlier.
The central bank lowered its GDP forecast for this year to 5.1% from 6.0% projected in the July report in light of lingering supply chain disruptions and labor shortage. The bank sees 4.3% growth in 2022, revised down from 4.6 percent forecast three months earlier and 3.7% expansion in 2023, revised up from 3.3 percent previously.
The BOC will release its next MPR in the Jan. 26 policy rate announcement.
Deputy Governor Toni Gravelle will give a speech on the bank’s Economic Progress Report at 1400 EST on Thursday.