The Bank of Canada kept borrowing costs unchanged, but stressed strength in the labor market and worries about inflation that will likely keep expectations of imminent interest rate hikes intact.
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In a statement-only decision on Wednesday, policy makers led by Governor Tiff Macklem left the overnight overnight rate unchanged at 0.25% and reiterated that the economy continues to require significant monetary policy support.
The employment rate returned to pre-pandemic levels despite the fact that recent job gains have been broad-based based on recent job gains, and officials dropped a reference to inflationary pressures being temporary.
While the language changes from the previous decision were incremental, there is nothing in the statement that could derail investor expectations that the Bank of Canada is about to embark on an aggressive campaign of rate hikes.
The statement said that the economy had a lot of momentum into the fourth quarter because of recent economic indicators that indicate that the economy has been strong in the fourth quarter and that the impact of global supply constraints is feeding through to a broader range of goods prices. The Bank of Canada is at the forefront among the Group of Seven central banks in slowing its efforts in reducing its stimulus efforts.
In October, it ended its bond-buying program and increased the potential timing of future rate increases amid concerns that supply disruptions are driving up inflation. Markets are pricing in rate hikes in Canada next year at a faster pace than the Federal Reserve, which has yet to end its quantitative easing program.
Before Wednesday, investors were pricing in five Canadian increases next year, with a more than 50% chance of a first hike by January. The stand-pat decision was expected by all 22 economists surveyed by Bloomberg News. The markets had put the chances of a hike this week at about a 20%.
The Canadian yields fell to 1.09% at the front end of the curve, with two-year yields sliding about five basis points to 1.09% at the beginning of the curve. Before trade close to where it was before the decision, the loonie reversed earlier gains.
Simon Harvey, senior FX market analyst at Monex Europe Ltd., said by email that he was hawkish but non-committal.
The central bank said in the statement that it would maintain its extraordinary forward guidance that the benchmark overnight policy rate won't be increased until the recovery is complete. It stated that the projections for October don't see that happening until the middle quarters of 2022.
Officials said they are keeping their overall holdings of Canadian government bonds roughly the same.
We continue to expect a go-slow approach as the pandemic fades, subject to inflation developments. Our baseline is lifted in April and a total of three hikes next year, each of 25 basis points. In their assessment of the global economy, the central bank said activity continued to recover, with inflation increasing in many countries as demand comes up against supply disruptions. The omicron variant has injected renewed uncertainty into the global economic picture.
In Canada, policy makers highlighted a rebound in the jobs market, citing certain indicators of tightness such as elevated job vacancies and accelerated wages. Growth could be affected by the emergence of the omicron variant, along with recent floods in British Columbia. There were some nuanced changes around the language on inflation. The effects of global supply constraints will take some time to work through, given existing supply backlogs, according to the central bank. They said they expect inflation to stay elevated in the first half of 2022, before easing back to 2% in the second half of the year.
The bank is watching inflation expectations and labor costs to make sure that the forces pushing up prices don't become embedded in ongoing inflation, officials said. A similar sentence in the October statement described these forces as temporary.
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