Bank of Canada keeps its overnight rate unchanged amid worries about Omicron and inflation growth

On Wednesday, the Bank of Canada decided to keep its key lending rate at 0.25%. However, it noted that an improving labor market and worries about inflation growth will probably keep forecasts of interest rate increases unchanged.

The BoC Governor Tiff Macklem stated once again that the national economy still requires significant monetary policy support.

According to the Bank, such a cautious approach is caused by several factors, including the new Omicron COVID-19 variant, oil prices decline, the flooding disaster in British Columbia, and pandemic-caused supple issues.

At the same time, the central bank pointed that the recent inflation is only temporary and that job growth we’ve seen lately is broad-based, with the employment rate returning to its pre-pandemic levels.

Although the tone change from the previous meeting was incremental, there’s nothing in the Bank’s statement that could change investors’ predictions that the BoC will soon start raising rates.

Canada’s central bank is at the forefront among Group of Seven in reducing the economic stimulus.

As you know, in October, it closed its bond-buying program and pushed the potential timing of future rate increases closer due to concerns that supply disruptions are leading to inflation hike. According to markets, Canada will see its interest rates going up next year faster than in case of the U.S., where the quantitative easing program still works.

“We still expect a slow approach as the pandemic fades, depending on the inflation changes. We expect a rate increase in April and a total of three hikes in 2022 – each by 0.25%,” – noted Bloomberg economist, Andrew Husby.

The BoC’s ability to start acting is restrained by its own promise not to raise interest rates until we reach a full economic recovery. In October, the Bank said it wouldn’t happen until the “middle quarters” of 2022. In other words, April is the earliest possible period. Nevertheless, we’ll get new projections in January, and they may give the Bank more options to start acting sooner.

The Bank’s next rate meeting is scheduled for January 26, 2022.

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