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Bank of Canada increases interest rate

On March 2, 2022, the Bank of Canada began its rate hike cycle by increasing its target for the overnight lending rate by 25 basis points to 0.5%. The Bank will also be maintaining its portfolio of government bonds until it is deemed necessary to start reducing the overall size of its balance sheet.

The Bank views the Russia-Ukraine conflict as major source of uncertainty, that which has led to increases in oil and other commodity prices, stoking further global inflationary pressures, and likely causing a drag on global growth. Amidst these recent geopolitical developments however, the global economic recovery to date has so far turned out to be in line with the Bank’s projections, with some advanced economies even experiencing a greater uptick in activity than previously anticipated.

The Canadian economy registered a strong growth outturn in the fourth quarter of last year, expanding by 6.7%, due in part to an increase in exports on the back of strong global demand. The labour market, however, continued to be negatively impacted by the Omicron COVID-19 variant, that which contributed to temporary layoffs and increased employee absenteeism, particularly across the services sector. Notwithstanding, the Bank maintains a positive near-term economic outlook, buoyed by an expected increase in household spending going forward. Housing market activity continues to remain upbeat with home prices remaining elevated, the Bank also noted.

January’s Consumer Price Index print came in at 5.1%. Although in line with the Bank’s expectations, it still remains well outside the Bank’s target range. More importantly, the Bank noted price increases have become more broad-based as evidenced by the fact virtually all measures of core inflation recorded gains. The Bank now expects inflation to be higher in the near term than previously anticipated, along with the risk of longer-term inflation expectations being anchored to the upside.

As the economy continues to expand and inflationary momentum picks up, the Bank is anticipating the need for additional rate increases along with further scaling back of its government bond purchasing program i.e., quantitative tightening (QT). In light of this, markets are pricing in about five to six rate hikes for the remainder of 2022, with the benchmark interest rate potentially rising a full percentage point to reach 1.5% by the end of this year.

The Bank of Canada’s next scheduled interest rate announcement will be on April 13, 2022. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in its Monetary Policy Report at the same time.

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