There were expectations that the Bank of Canada would increase interest rates. However, in an unprecedented move, the decision was made to maintain the core lending rate at a very low 0.25%. This target was set at the beginning of the pandemic in March 2020. It was viewed as a means to ensuring businesses and consumers would have easier access to cheap lending rates despite anticipated economic difficulties brought on by the pandemic.
However, it is this rock-bottom lending rate that has been identified as a key contributor to inflationary woes the country is facing. The inflation rate was reported to have hit a 30-year high of 4.8% in December 2021. The low lending rates have put the housing market into overdrive, with many markets experiencing steep price increases that are yet to abate.
The bank has said that with the onset of the new Omicron variant causing uncertainty, it was not yet ready to make changes to the interest rate. It did however express optimism at the economy’s ability to withstand the impact of the new variant due to the country’s high vaccination rate and previously proven ability to adapt to new variants over the last two years. Governor Tiff Macklem noted that the Canadian economy had strong momentum heading into 2022 and that emergency policy settings associated with the pandemic were now over.
Monex Canada’s foreign exchange analyst, Simon Harvey, has expressed disappointment in the bank’s decision to pause interest rate hikes further, calling it a policy misstep that would prove costly later on. Manulife Investment Management Global Macro Strategist, Eric Theoret, however, believes the delay in hiking rates may be due to a monetary policy lag. CIBC chief economist, Avery Shenfeld predicts that the Bank of Canada will raise rates from March, the same period during which the US Federal Reserve has also indicated plans to start raising its benchmark interest rate as well.
Other experts are warning that when the bank does start to hike rates, it may do so slowly but in a row of quick successions that consumers should be prepared for. It was noted that though people may not feel the pinch with the first increase, they will by the time the second increases kick in.
Despite putting a hold on its lending interest rate, the bank did raise inflation projections, indicating that consumer price growth would likely remain at about 5% for the first half of the year, before declining to 2.3% in 2023. It attributed this to supply chain challenges and rising food and commodity prices. The bank also added that interest rate hikes were not far off from being implemented.
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