By Julie Gordon and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada held its key interest rate unchanged on Wednesday while signaling it would soon start hiking it, a move that surprised some analysts who had expected the central bank to take a first step toward tackling surging inflation.
The central bank instead removed its exceptional forward guidance, essentially a commitment to keep its key rate at the current record low of 0.25%, on the grounds that economic slack had been fully absorbed and inflation was set to be higher than previously predicted.
“Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target,” it said in a statement.
The Bank of Canada will make its next interest rate announcement on March 2. It slashed rates three times in March 2020 as the coronavirus pandemic took hold.
The decision to hold may have been a “policy misstep,” considering the current inflation backdrop and surging home prices, said Simon Harvey, head of FX analysis for Monex Europe and Monex Canada.
“Their decision to sit on the fence today may force them into a steeper hiking path later in the year,” Harvey said.
But others saw no harm in waiting five more weeks to move, saying it would have been worse to raise rates without first removing the commitment to keep them at record lows until slack was absorbed.
“They don’t compromise the credibility of the forward guidance for the next time they have to use it, because we know that there will be such a next time,” said Jimmy Jean, chief economist at Desjardins Group.
After the decision, money markets were pricing in about a 90% chance the central bank would hike its key rate to 0.50% in March, with at least five increases in total this year.[BOCWATCH]
The Bank of Canada said inflation would remain close to 5% over the first half of 2022, before easing to about 3% by the end of the year. In October, the central bank said it expected inflation to return to around 2% by the end of 2022.
Canada’s inflation rate hit 4.8% in December https://www.reuters.com/business/canadas-annual-inflation-rate-hits-48-dec-highest-since-sept-1991-2022-01-19, the highest level since September 1991 and the ninth month in a row it was above the Bank of Canada’s 1%-3% control range. Inflation has not been this high for this long since the central bank set its 2% target in 1991.
The Canadian dollar gave back earlier gains to be unchanged on the day at 1.2627 to the greenback, or 79.20 U.S. cents. The yield on the Canadian 2-year bond eased 6.5 basis points to 1.175%.
Source : Reuters /Investing.com
