Bank Of Canada Signals Rate Hikes To Come Despite January Hold

• On January 26, the Bank of Canada held its policy interest rate at 0.25%, a surprise to the market, which had anticipated a 25 basis point (bps) hike. Fitch Solutions expected the BoC would raise the policy rate in Q122, either during its January or March 2 meeting. Fitch maintained its forecast for 75 bps in hikes in 2022, bringing the policy rate to 1.00% by year-end. 
• In his remarks following the January meeting, BoC Governor Tiff Macklem took a more hawkish tone and stressed that the central bank had already shifted away from the extraordinary accommodative measures enacted during the Covid-19 pandemic. 
• The BoC concluded the asset-purchasing programme in October 2021, and the January statement omitted the forward guidance of maintaining the policy rate at the effective lower bound. The statement also highlighted that the tightening labour market and ongoing economic momentum indicated that ‘the overall slack in the economy is absorbed, thus satisfying the condition outlined in the Bank’s forward guidance on its policy interest rate’. 
• Macklem said that Canadians should expect the BoC to hike the policy interest rate in the near term to help curb inflation, which accelerated to 4.7% y-o-y, above the central bank’s 1.0-3.0% target range, in December. Fitch also forecast inflation will remain elevated, averaging 3.7% in 2022.

 

(Source: Fitch Solutions)