RBC analyzes the Bank of Canada’s strategy for 2022

RBC Economics noted that the central bank’s strategy for 2022, including possible rate increases, will show how well the Bank of Canada copes with pandemic risks.

The recent record-high COVID-19 cases caused by the contagious Omicron variant forced certain jurisdictions to re-introduce containment measures.

“We’ll get more information on the severity of this wave during the coming weeks, but at this point we are treating it as a speed bump for an economic recovery that will continue in 2022,” – RBC said. “Its influence on inflation is less clear as it may worsen the supply chain bottlenecks and support prices growth.”

According to RBC, this month will be crucial for the BoC’s general 2022 strategy. The central bank’s interest rate announcement is scheduled for January 26.

“Even with containment measures potentially slowing the national economic recovery at the beginning of this year, we believe the BoC will show some activity in January and lay the groundwork for near-term rate hikes,” – RBC noted. “Markets don’t expect Omicron to change the BoC’s tightening plans either – they predict at least three increases in 2022.”

“In our opinion, the central bank will take the long view and signal about the future rate hikes even with certain restrictions being kept,” – RBC said.

Last month, the BoC said it plans to keep its 2% inflation target for the next five years, which will “help the Bank solve the issues of structurally low interest rates by using a wide range of tools, including sometimes holding its key lending rate low for longer than usual. The Bank will use the flexibility of the 1%-3% range only to an extent that is necessary to keep medium-term inflation expectations at 2%.”