The Bank of Canada is delaying the inevitable: Mortgage analyst
The Bank of Canada decided on Wednesday to leave its key policy rate at 0.25 per cent for at least a little while longer.
However, the central bank said Wednesday that the economy is now operating at full capacity, adding that Canadians should be prepared for rate increases as early as the bank’s next meeting in March.
Here’s how Canadian economists and financial analysts are reacting in reports to clients and interviews with BNN Bloomberg:
Stephen Brown, senior Canada economist, Capital Economics
Markets had essentially given the bank a green light to start hiking but it opted not to, instead leaving the policy rate at 0.25 per cent. We assume that was due to concerns about the negative optics surrounding a rate hike while much of the country is still facing coronavirus restrictions. The conditions to start raising interest rates have been met.
Rob McLister, mortgage analyst, RateSpy.com founder
The Bank of Canada is just delaying the inevitable. When we’re going to get rate hikes, it’s going to be the start of a long climb towards what the new normal is for rates. And who knows what that is? The Bank of Canada thinks it’s going to be somewhere around 2.25 per cent, give or take.
Scott Terrio, consumer insolvency expert, Hoyes, Michalos & Associates
Well, you can’t say Canada is dull anymore. So, this was fun. The rate hikes are coming at some point, there will be more debt to deal with, probably more inflation to deal with. … I think you’re going to see a lot of people that have been pushed to the edge (go) just over it once the hikes come.
Avery Shenfeld, chief economist, CIBC Capital Markets
The Bank of Canada judged that a fresh pandemic wave wasn’t the opportune time to launch into a rate hike cycle, or just wanted to formally end its forward guidance before actually pulling the trigger, but left no doubts that rate hikes are coming. We see the bank hiking in March if better news on the virus arrives in time.
Ryan Bushell, president and portfolio manager, Newhaven Asset Management
I’m not sure if I was surprised by this. I think it makes sense for the Bank of Canada to go slow, prepare people and allow things to be adjusted by the market over a long period of time. So, whether the rate hikes are today or six weeks from now, I don’t think it makes a huge amount of difference in the long term. But I think in the short term, it might have helped to smooth out some of that volatility.
Nigel D’Souza, financial services analyst, Veritas Investment Research
The cover was there for the bank to hike the policy rate without surprising the markets. And I’m not sure why the Bank of Canada didn’t take up that opportunity. By the bank’s own assertions, it takes about 12 to 18 months for the change in the policy rate to have an impact on inflation. And inflation is already at a multi-year, multi-decade high. Based on the Bank of Canada’s own research, they’re well behind the curve on controlling inflation and containing it.
I think we still have to have a pretty and quickly accelerated hike of rates. I’m surprised the Bank of Canada didn’t hike today, but I’m sure it will be coming this year.
Ed Devlin, founder of Devlin Capital
I am on the other side of this issue. I actually agree with Bank of Canada Governor Tiff Macklem. I think we have a tremendous spike (in inflation), and if it was really any other business cycle other than a pandemic, I would be very concerned. But I think he did a very good job explaining that demand for goods and services has changed a lot because of the pandemic — we’re consuming more goods than services — and that’s just causing some frictions in the economy. Hopefully, fingers crossed, as the pandemic moves into the next phase, we’ll consume more services than goods and that’ll likely change things.
Simon Harvey, senior FX market analyst, Monex Canada
The decision, in our view, is a policy misstep from the governing council and is one that could prove costly later down the line. By effectively loosening financial conditions at [Wednesday’s] meeting, the Bank of Canada risks emboldening near-term inflation expectations and flaming the fire underneath the housing market. This could result in liftoff taking the shape of a 50 basis point hike at March’s meeting, should inflation expectations continue to rise and labour market metrics remain resilient to Omicron impacts in the first quarter. In analogous terms, should the data continue to print in a similarly robust fashion to the fourth quarter, the bank has effectively swapped out a soft landing for the Canadian economy in favour of cutting the strings and reaching for the emergency parachute.
Josh Nye, senior economist, RBC Economics
The BoC decided to use today’s meeting to tee up forthcoming rate increases, noting that its forward guidance condition has been met (i.e. economic slack has been absorbed) and clearly indicating upcoming meetings are ‘live’ for rate hikes. The fact that its next meeting is a short five weeks away may have contributed to the BoC’s patience.
Joey Mack, director of fixed income, RF Securities
This is the pivot point. We’ve had a huge run in equity markets recently. So, to expect that kind of run over the next several years is unlikely. I think for a lot of investors right now, they’ve been sitting in equities and sitting in cash and not a lot of bonds, because they’ve been afraid that rates are going to rise. Well, the case here is that rates have essentially risen. So, it’s probably time to take some of that cash and put it back into fixed income.
Royce Mendes, head of macro strategy, Desjardins Group
It would have been a tough sell for the governor to come out today, hike rates and then [in a] few weeks time, we find out that the labour market shed 100,000 or 200,000 jobs. But we don't need to have virus cases down to zero. What we need to see is that the Omicron wave is cresting and then fading away. And we can make the extrapolation that conditions are ready or will be ready to handle higher rates.
Canadians are highly leveraged. So each rate hike is going to inflict significant pain on the Canadian economy. That doesn't mean the Bank of Canada shouldn't do it, but it means they should take their time in assessing how much tightening is actually needed.
Earl Davis, head of fixed income and money markets, BMO Global Asset Management
It’s been very hawkish days on both Canada and the U.S. side of things. But we expect significantly higher rates, shorter and sooner than expected.
There is danger with the Bank of Canada waiting to raise the rates in March if they only raise it by 25 basis points — which is why I’m anticipating a 50 basis point increase. It takes 18 months for any interest rate hike right now to impact the economy. The bank is already significantly behind the market, so they have got to get up to pace to ensure that inflation expectations don’t run out of hand, which they’re starting to.
David Boyle, head of economics, Macquarie Group
It’s almost splitting hairs whether or not you think the Bank of Canada should’ve hiked interest rates today or wait till March. But the overall message remains the same: there will be a series of rate hikes in 2022.