BoC Holding Interest Rate Again, But Maybe For The Last Time

The Bank of Canada (BoC) announced today that it is again holding its benchmark interest rate at the effective lower bound of 0.25%, but it has removed its "extraordinary forward guidance", meaning that we can expect the rate to rise as early as early March. The BoC said that economic slack has now been absorbed, pointing to the increase in employment in the last year (job numbers are now above pre-pandemic levels); the probable continuing high inflation due to supply chain bottlenecks and a tightening labour market; a robust, if uneven, international economic recovery; strong Canadian GDP growth; and a weaker-than-expected effect of the Omicron COVID-19 variant. 

The Bank is forecasting Canadian GDP to grow by 4.5% in 2021 and 4% in 2022. It also expects inflation to be about 5% in the first half of 2022, easing to 3% by year-end. This expectation means that the BoC will revert to its traditional role of using monetary policy to control inflation. In line with future interest rate increases, the BoC said it would consider reducing its holdings of Government of Canada bonds (part of its quantitative easing program) when it beging hiking rates. At present, BoC policy is to maintain current levels of bond holdings. You can read the Bank's full announcement here.