Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud

Bottom line

As expected, the central bank left its policy rate unchanged at 0.25% and continued “reinvestment phase” of its quantitative easing program. The Bank of Canada also kept its forward guidance that it expects to hike its policy rate in the middle quarter of 2022. The framing of the forward guidance allows plenty of flexibility to the Bank of Canada on the timing of the first rate hike, covering meetings from April to September. In addition, it will enable it not to overreact to either negative or positive surprises or increased uncertainty coming from the impact of Omicron on the global economy.

Overall, today’s Bank of Canada statement was relatively neutral and didn’t change our view of monetary policy for the coming year. We continue to expect the Bank of Canada to start its policy tightening at the April meeting.

The Bank of Canada left its policy rate unchanged at 0.25% and maintained the reinvestment phase of its quantitative easing program. This was in line with market expectations. However, the end of the quantitative easing program doesn’t mean the Bank of Canada will no longer buy government bonds. The “reinvestment phase” means the Bank of Canada will purchase government bonds solely to replace maturing bonds, keeping its holding of government bonds constant.

The Governing Council also reiterated that it “remains committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved”.

The Bank of Canada left unchanged when it expects the economic slack to be absorbed to the middle quarters of 2022, suggesting the central bank believes it could increase its policy rate by 2022Q2.

The central bank expects the global recovery to continue but note that Omicron adds uncertainty to the outlook. The Banks notes that “inflation has increased further in many countries, reflecting strong demand for goods amid ongoing supply disruptions” and that “the new Omicron COVID-19 variant has prompted a tightening of travel restrictions in many countries and a decline in oil prices, and has injected renewed uncertainty.”

The Bank of Canada notes that the Canadian economy “had considerable momentum into the fourth quarter.” The Bank of Canada acknowledges the strong employment gains, elevated job vacancies and the pick-up in wage growth all suggest the economy is improving. However, it also notes that the floods in BC and the uncertainty regarding Omicron could weigh on growth, increase uncertainty and could compound the supply chain disruptions.

The Bank of Canada continues to view the elevated inflation due to the global supply constraints. The Bank notes that the recent decline in gasoline prices could hold back inflation somewhat after being a major factor pushing inflation higher. The central bank continued to expect inflation to remain elevated until mid-2022 before easing toward its 2% target.

Independent Opinion

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