Overnight Canadian Policy Interest Rate Undergoes First Post-Pandemic Hike
March 2, 2022
A trio of 50-basis point rate cuts in March 2020 had lowered the overnight rate to an effective low of 0.25%. From April 2020 through the end of October 2021, monetary easing was supplemented by a program of bond purchases, and maturing bonds have until now continued to be reinvested. As widely expected, the policy rate was doubled to 0.50%. This was the first rate increase since October 2018, and although maturing bonds for now will continue to be reinvested, today’s statement explaining the Governing Council’s decision served notice that officials are now “considering when to end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink,” and this will complement monetary tightening via today’s and future rate increases.
Several economic surprises have occurred recently. Fourth-quarter 2021 Canadian economic growth surpassed what bank officials had been assuming. Growth in the current quarter also now appears more solid than previously projected. Price inflation has become more pervasive, boosting core inflation. Russia’s invasion inject a fresh impetus to rising costs for fuel and food. All of such “increases the risk that longer-run inflation expectations could drift upwards” and further away from the 2% target.
The timing and pace of future monetary tightening will be driven by the implications of forthcoming data and other developments likely to affect economic trends.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Canada
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