Canada: Bank of Canada keeps rates unchanged in December meeting; continues its reinvestment phase
At its meeting on 8 December, the Bank of Canada (BoC) held its target for the overnight rate at 0.25%—its effective lower bound—in line with market analysts’ expectations. The Bank also decided to continue with its reinvestment phase, buying government bonds to replace maturing ones.
The Bank’s decision to keep the target for the overnight rate unchanged was predominately driven by still-recovering economic activity, with lingering supply-related bottlenecks weighing on momentum. The Bank noted that economic activity domestically and abroad has continued to grow robustly—supported by the ongoing vaccine rollout—although the recovery remains uneven across sectors and employment groups and is losing momentum after strong output in Q3. On the price front, inflation has remained elevated, and some factors previously deemed to be temporary are now expected to keep inflation high for a longer period, mainly due to ongoing supply disruptions and strong demand.
Looking ahead, the BoC is committed to keeping its target for the overnight rate at its effective lower bound until “economic slack is absorbed so that the 2.0 percent inflation target is sustainably achieved”. The Bank’s latest estimates see this occurring sometime in the middle quarters of 2022. This is broadly in line with our panelists’ projections, but given the hawkish turn of the Fed in mid-December a few panelists have moved up their estimates, now seeing the first rate hike in Q1 next year.
Commenting on the outlook for monetary policy, Benoit P. Durocher, a senior economist at Desjardins Group, noted:
“Under the current conditions, we could see the first rate hike in April. That’s assuming concerns about Covid-19 ease and the Canadian economy continues to recover. For the time being, the BoC does not appear to be rushing to raise key rates, but it will
keep a close eye on high inflation and impacts on wages and inflation expectations in the months ahead.”
The next meeting is scheduled for 26 January.