Bank of Canada Holds Rates Despite Surging Inflation

The Bank of Canada surprised markets Wednesday by keeping its key lending rate at 0.25 per cent, while putting Canadians on notice that interest rates will eventually rise.

The central bank decided to hold on rates despite surging inflation and a stronger-than-expected economic recovery. Heading into the decision, Bloomberg data showed the implied probability of a hike on Wednesday was approximately 70 per cent.

In its statement, the bank acknowledged slack in the economy has been absorbed but that the Omicron variant of COVID-19 is weighing on growth in the first quarter.

It also said while near-term inflation expectations have moved higher, the longer-run projections are still anchored on the bank’s two per cent target.

“The bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation,” it said in the statement, while adding that it expects interest rates to rise in the future.

In the bank’s Monetary Policy Report (MPR), it said it projects inflation will remain near five per cent in the first half of the year, bolstered by ongoing supply chain issues and rising food and commodity prices, before easing to 2.3 per cent in 2023.

“The Bank of Canada judged that a fresh pandemic wave wasn’t the opportune time to launch into a rate hike cycle, or just wanted to formally end its forward guidance before actually pulling the trigger, but left no doubts that rate hikes are coming,” said Avery Shenfeld, chief economist at CIBC Capital Markets, in a report to clients.

By Michelle Zadikian of BNN Bloomberg