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Canada Monetary Policy March 2022

Canada: Bank of Canada raises rates in March, continues with its reinvestment phase

At its meeting on 2 March, the Bank of Canada (BoC) raised its target for the overnight rate from 0.25%—its effective lower bound—to 0.50%, which was 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 raise the target for the overnight rate was predominately driven by surging inflation pressures amid healthier economic activity. The Bank noted Russia’s assault on Ukraine introduced a major source of uncertainty and will likely further fuel price pressures ahead due to soaring commodity prices and renewed supply chain disruptions. Moreover, both domestic and global economic activity continued to improve inline with the Bank’s previous projections, allowing for some space to raise rates without hindering growth.

Looking ahead, the BoC is committed to using its “use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored.”. Consequently, the Bank is likely to raise rates further this year in an attempt to tame price pressures. The majority of our panelists expect several more rate hikes before the end of the year.

Commenting on the outlook for monetary policy, Royce Mendes, managing director and head of macro strategy at Desjardins Group, noted:

“Don’t be surprised if monetary policymakers continue raising rates even if growth in so-called interest rate sensitive parts of

the economy slows or headline inflation cools. The typical metrics for measuring the impact of monetary policy will be less useful

during this unique tightening cycle. Policymakers will therefore need to proceed with caution. As a result, after raising rates again in April, expect central bankers to give themselves more time between further rate increases during the remainder of this year. Our forecast even includes an extended pause in 2023 for the BoC to gauge how much more monetary tightening the economy can handle.”

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