This week's rate hold should not be viewed as indicative of the road ahead
Maintaining interest rates at 0.25% surprised many and some believe it was a mistake, but the Bank of Canada was clear on its overall mission.
When the decision was announced Wednesday, the same day that the Fed also held steady, it came with a clear signal that this was not a long-term continuation of the low-rate environment we have become used to.
In a press conference, senior deputy governor Carolyn Rogers said that the pandemic recovery globally is strong but noted supply chain issues. She also highlighted that the Canadian economy had outperformed expectations in the second half of 2021, and it seems that economic slack has now been absorbed.
But she made clear that the BoC had three important messages:
- Emergency measures to offset the pandemic’s impact are no longer needed.
- Interest rates will need to rise to tackle inflation.
- The BoC is committed to bringing inflation back within its target limits.
Expanding on these, Ms. Rogers said that Canadians should expect a path of rising interest rates – this was a clear signal, she said, adding that having committed to giving people notice about changes, the BoC’s communication with Canadians was something it took very seriously.
A mistake?
A panel of leading economists and other experts convened by Finder.com was split on whether the BoC had made the right decision.
While less than half (44%) think the rate should have been held this week, 69% are calling for a rate rise in this quarter.
Brett House, deputy chief economist at Scotiabank is one of the 50% of panellists that believes the bank should have raised the rate on January 26:
“The Bank of Canada risks falling behind the curve with inflation and wage expectations rising along with big increases in housing costs and could contemplate a more front-loaded approach to raising rates in the hope that this would mean a lower terminal rate than our forecast, 2.50% could be adequate to contain price pressures,” he said.
Meanwhile, Nikola Gradojevic, finance professor at the University of Guelph, believes holding back until the fall would be the right choice.
“The pandemic is clearly seasonal and hopefully it will become ‘endemic’ after the omicron variant wave ends,” he said. “Sure, there is an urgent need to fight inflation, but the pandemic is more important than that.”
We’ll have more reaction to the interest rate decision later and the full Finder report is available at https://www.finder.com/ca/bank-of-canada-interest-rate-forecast
