Bank of Canada Holds Rates, Says High Inflation Will be Temporary
The Bank of Canada’s Wednesday rate announcement was “steady as she goes,” as it maintained its Quantitative Easing program and reiterated that rates should stay where they are until the second half of next year.
The overnight lending rate remains at 0.25%, where it’s been since last March. But that’s expected to change about a year from now, according to the BoC’s guidance.
“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved…this happens sometime in the second half of 2022,” its statement read.
The other hot topic was inflation, which the Bank expects will remain elevated over the short term.
“While CPI inflation will likely remain near 3% through the summer, it is expected to ease later in the year, as base-year effects diminish and excess capacity continues to exert downward pressure,” the BoC said.
The Reaction
There was no shortage of analysis into the Bank’s statement and what it may foretell. Here’s some of it…
“There was nothing all that surprising in today’s statement. With the economy performing broadly in line with the Bank’s April projections, we didn’t see scope for any hawkish adjustments to policy…As for the policy rate, it’s unlikely July will bring a change in forward guidance, but we continue to flag the BoC’s less flexible policy mandate and upside risks to output gap closure as drivers for a rate hike earlier in its forward guidance ‘window’ (i.e., in Q3 rather than Q4).”
— National Bank economists
“After turning sharply more optimistic in April, the Bank of Canada hasn’t backed off at all despite two months of lockdowns for large segments of the country. The willingness of policymakers to shrug off what could be a big miss on their first-half growth forecast clearly points to a hawkish bias. We had been expecting the next [QE] taper to come in October…but today’s Statement suggests the Bank wants to act sooner rather than later.”
— Benjamin Reitzes, BMO Economics
“On inflation, they flagged the rise of CPI inflation ‘to around the top of the 1–3 percent inflation-control range,’ which is an understatement. It’s already materially above the upper band and when StatsCan adjusts for pandemic-era spending weights in July the June CPI report is likely to climb closer toward 4% y/y and perhaps overshoot.”
— Derek Holt, Scotiabank
“We remain skeptical…that the Bank will raise interest rates in 2022 as its current forecasts imply, given the likelihood that inflation will drop back below 2% next year…[Even though we] expect inflation to surpass the upper limit of the Bank of Canada’s 1% to 3% range for most of the rest of the year…we continue to think that it will drop back to less than 2% in 2022.”
— Stephen Brown, Capital Economics
“July’s meeting could be a bit more interesting. At this stage, we don’t see any need for dramatic forecast revisions, and the BoC’s guidance that rates might have to start increasing in the second half of next year remains appropriate. It looks like the main question will be around further tapering of the BoC’s asset purchases…If incoming data aligns with the BoC’s forecasts, we could see it reduce weekly bond buying again in July, to $2 billion per week from $3 billion currently.”
— Josh Nye, RBC Economics