Bank of Canada Drops Exceptional Forward Guidance that Had Committed Keeping Policy Rate at 0.25% Until Around Mid-2022

January 26, 2022

While keeping the central bank’s overnight policy rate at 0.25%, Bank of Canada officials today made a substantial modification in the forward-looking part of their released statement. Previous statements including that after last year’s final policy review on December 8 had promised to “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.” Early in the pandemic, a trio of 50-basis point rate cuts were engineered in March 2020 that left the key interest rate at 0.25%, then and still identified by officials as an effective lowest possible rate level without endangering financial market functionality.

This month’s meeting coincided with the quarterly release of updated macroeconomic forecasts embodied in the Monetary Policy Report. In the prior MPR released in October, officials had felt that economic slack would not be fully reabsorbed until “sometime in the middle quarters of 2022,” but now believe that condition for interest rate lift-off has in fact been completely met as a result of stronger-than-expected Canadian economic growth in the final quarter of 2021 and signs of the labor market has tightened significantly. With plenty of momentum coming into 2022, real GDP is projected to advanced 4.0% this year followed by 3.5% in 2023. Such a pace would exceed the potential non-inflationary trend of GDP expansion. Near-term expected inflation has been moving up, and wages are climbing more rapidly, too. Actual CPI inflation of 4.8% in December was the highest since September 1991 and up from 1.0% in January of last year.

The next scheduled policy announcement on March 2 is thus in play for possible interest rate lift-off. Quantitative stimulus had already ended, but for now officials intend to continue to reinvest maturing bond holdings, which will prevent the central bank’s balance sheet from shrinking. In short, Canadian monetary policy has aligned itself with the presumed course of Fed policy.

One interesting revelation in the Monetary Policy Report concerns assumed global GDP growth this year. Euroland’s projected 4.0% rise of GDP in 2022 exceeds the forecasts of 3.8% growth in China, 3.7% growth in the United States, 2.7% growth in Japan, and 3.4% growth in the rest of the world.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.





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