Bank of Canada Maintains Policy Rate, but Sets Stage for Increase

The Bank of Canada started its 2022 schedule of interest rate announcements by keeping its target for the overnight lending rate at 0.25%. However, the Bank decided to remove forward guidance for future policy rate decisions considering their view that overall economic slack in the Canadian economy has been fully absorbed.

The Bank indicated the global economic recovery from the COVID-19 pandemic continues to be strong but somewhat uneven. The Bank noted inflationary pressures due to demand and supply imbalances continue to build up across several regions, and oil prices have now rebounded above pre-pandemic levels. With expectations mounting that monetary policy will be normalizing sooner than previously anticipated, financial conditions, while still accommodative, have been tightening a bit in anticipation of coming rate hikes.

Canadian economy continues to recover

Canadian economic activity in the second half of 2021 appeared to have been more upbeat than was previously expected, according to the Bank. The labour market has tightened considerably amidst strong growth in employment, coupled with an uptick in average wages. There has also been an increase in job vacancies as hiring intentions among employers remain upbeat. There continues to be rapid turnover in the housing market with home prices maintaining its upward trajectory. These, in addition to other factors, have fueled the growth momentum into 2022, leading to the consensus within the Bank that economic slack in the economy has now been absorbed.

Overall, the Bank projects the Canadian economy will expand by 4% and 3.5% in 2022 and 2023 respectively, on the back of 4.5% growth in 2021. Both the 2022 and 2023 Gross Domestic Product (GDP) growth estimates have been revised down slightly from their previous 4.3% and 3.7% projections, respectively.

The Bank stated the Consumer Price Index (CPI) measure remains well above its target while core measures of inflation have also crept up since the backend of last year. The Bank foresees CPI inflation to come in around 5% for the first half of this year, moderating to about 3% by year end, and then gradually abating towards the Bank’s 2% target over the course of the projection horizon. Full year inflation for 2022 is projected to come in at 4.2%, a 0.8 percentage point increase from the previous forecast. The 2023 inflation projection remains at 2.3%

Hike coming soon

Over the last few weeks leading up to this decision, there had been a growing conversations around an interest rate hike. In that context, the decision to leave rates unchanged may seem a bit dovish. But that convesation was not the consensus.

The Bank had previously signaled the first rate hike of the upcoming tightening cycle would be somewhere between April and September. The bottom line of today’s announcement, reading through all of the technical jargon, is the Bank will be raising rates at its next scheduled announcement in March, which is sooner than even the earliest date it had previously suggested.

Markets are currently pricing in between four and five interest rate increases over the remainder of 2022, with, not surprisingly, close to a 100% chance of the first hike in March.

The Bank of Canada’s next scheduled interest rate announcement will be on March 16, 2022.

Learn more on creastats.ca.

CREA complies and analyzes numerous factors affecting the real estate market for the public, REALTORS® and governments.


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