The Bank of Canada sounded alarms regarding rising inflation on Wednesday, signalling the end of quantitative easing, effectively expediting interest rate increases and broadening its flexibility to respond to inflation pressures.
While the Bank's benchmark policy rate of 0.25% held from the outset of the pandemic to today, the end of quantitative easing and statements about the persistence of inflation, supply-chain bottlenecks and higher energy prices portended potential rate hikes.
Bank Governor Tiff Macklem told reporters that while inflation was expected to ease, relative to the bank’s July forecast, its impacts were greater and longer-lasting.
"The key overnight lending rate was again held at 0.25%, but almost every other aspect of the release was a fire-breathing blast of concern on the inflation backdrop," BMO Chief Economist and Managing Director Douglas Porter wrote, noting that that the environment was also one of “mild growth.”
Senior Economist Sri Thanabalasingam of TD Bank wrote that the bank's analysts anticipated three interest rate increases over the course of 2022 that, cumulatively, would bring the rate to 1%.
The Bank emphasized that it wanted to give itself the flexibility to respond to shifting conditions, and Thanabalasingam’s note cautioned that volatile circustances could affect their course of action.
Porter projected even further out, extrapolating incremental increases across two calendar years.
"For now, we would assume that rate hikes progress quarterly until late 2023, bringing the overnight rate back in line with pre-pandemic levels two years hence,” Porter said.
The Bottom Line
Canada’s aggressive comments on inflation could serve as a call to action for other economies experiencing inflation, including the United States, which saw the dollar lose ground against major currencies, including the Canadian Dollar, Euro and Yen Wednesday.
“Our job is to make sure that the price increases we’ve seen in so many globally traded goods don’t feed through and translate into ongoing inflation, and we’re going to do our job,” Macklem told reporters. “If there are new developments, we start to see that feed through, and we will accelerate our actions to bring inflation back on target.”