— BOC’s Macklem: Taking Deliberate Steps Toward Higher Interest Rates
— BOC To Keep Govt Bonds on Its Balance Sheet Until It Starts Raising Rates
— BOC Revises Up 2022 CPI Forecast To 4.2% From 3.4%; 2023 Unchanged at 2.3%
— BOC Lowers 2022 GDP Forecast to 4.0% From 4.3%, 2023 To 3.5% Vs 3.7%
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% to continue supporting economic recovery during the pandemic but also decided to end its promise to keep its super-low rate until a specific time, opening the way for an early rate hike this year.
Now that the bank estimates Canada’s supply and demand balance is largely balanced, it has stopped using a “forward guidance” on near-term monetary easing commitment. Until December, the bank believed the economy, hit by excess capacity, continued to require “considerable monetary policy support.”
Until its December policy announcement, the bank had projected that a rate hike is likely to come “in the middle quarters of 2022” (sometime between April and September). Some economists expect the BOC to start raising rates in its next policy decision scheduled on March 2, which would be its first hike since October 2018, to be followed by a few more increases this year.
Some market participants had even priced in a rate hike on Wednesday.
BoC Governor Tiff Macklem defended the bank’s decision to hold rates at this point, saying, “We judge that it is appropriate to take a series of steps” toward normalizing its monetary policy stance while being mindful of the lingering negative impact of the pandemic on the economy.
Monetary policy should be “a source of confidence, not uncertainty,” he said, adding that the bank is taking “deliberate steps” and making a “significant shift.”
“We signaled very clearly to the Canadians that they should expect a path toward higher interest rates,” Macklem told a news conference. “We are on a rising path.”
How soon and how far the bank should tighten depends on the state of the economy at the time, he said.
BOC To Keep Assets Until Rate Hike Begins
The bank said it will keep its holdings of Government of Canada bonds on its balance sheet “roughly constant at least until it begins to raise the policy interest rate,” without specifying the timing.
“At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.”
Despite the drag from the pandemic, the Governing Council judges that overall slack in the economy is absorbed, “thus satisfying the condition outlined in the bank’s forward guidance on its policy interest rate.”
Ending Easing Commitment
“The Governing Council therefore decided to end its extraordinary commitment to hold its policy rate at the effective lower bound,” the bank said. “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.”
In December, the bank said it remained “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 bank is seeking to reassure to the public that the recent surge in food and energy prices has not derailed the bank’s control over inflation.
Longer-Term Inflation Views Anchored
“Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target,” the bank said. “The bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.”
Consumer inflation is forecast by the bank to remain close to 5 percent over the first half of 2022, but is expected to decline to around 2.2 percent by the second half of 2023 and remain close to the target in 2024, according to the bank’s quarterly Monetary Policy Report, which was also released Wednesday.
BOC Sees Higher CPI, Lower GDP in 2022
The bank revised up its consumer price index forecast for 2022 to 4.2 percent from its earlier projections of 3.4 percent made in October and 3.0 percent in July while leaving its CPI forecast for 2023 unchanged at 2.3 percent.
“This upward revision mainly reflects larger impacts from various supply issues, notably those affecting shelter costs and food prices,” it said.
Restrictions on economic activity amid the rapid spread of the more contagious Omicron variant and lingering global supply chain disruptions are expected to slow Canada’s economic growth.
It lowered its GDP forecast for 2022 to 4.0 percent from 4.3 percent projected in October and 4.6 percent forecast in July. It now expects the economy to grow 3.5 percent in 2023, revised down from its previous forecasts of 3.7 percent made in October and but higher than 3.3 percent in July.
The bank noted that Canadian GDP grew at a strong pace amid increased supply disruptions in the final quarter of 2021. The bank estimates that the output gap — the difference between GDP and supply — was about -0.75 percent to 0.25 percent in the fourth quarter, smaller than the estimate of -2.25 percent to -1.25 percent for the previous quarter.
Upside Risks To Inflation
In the report, the bank maintained its view that risk to its inflation outlook is “roughly balanced” with upside risks still “of greater concern,” forecasting the 30-year high inflation around 5% in Canada should fall back to the top of its target range of 1% to 3% by the end of 2022.
The bank expects inflationary pressures from reopening demand, supply shortages and high energy costs to “subside” this year, projecting the annual Inflation rate will “decline relatively quickly to about 3%” by yearend.
“Over the medium term, increased productivity is expected to boost supply growth, and demand growth is projected to moderate,” the bank said. “Inflation is expected to decline gradually through 2023 and 2024 to close to 2%.”
The BOC sees the risks around this inflation outlook as “roughly balanced,” the same as its assessment provided in its last MPR released in October.
But the bank also repeated its view that with inflation above the top of the bank’s inflation-control range and expected to stay there for some time, “the upside risks are of greater concern.”
Resilient Canadian Growth
The pandemic is slowing the economy at the start of 2022, but the bank expects “robust growth should resume in the second quarter.”
“The combination of high vaccination rates and improved adaptability of businesses and consumers limits the downside economic risks from this
wave of the pandemic,” it projected.
It also noted that the labor market is strong in Canada, having recovered to pre-pandemic levels by the end of 2021.
“The employment rate has fully recovered when accounting for demographic change, firms are having difficulty finding workers, and wage growth is rising,” the bank said. “Omicron is leading to some temporary job losses in hard-to-distance sectors and to a spike in worker absences more broadly, but these effects are expected to be short-lived.”
Contact this reporter: max@macenews.com
Content may appear first or exclusively on the Mace News premium service. For real-time delivery contact tony@macenews.com. Twitter headlines @macenewsmacro.