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Bank of Canada head signals rates could rise as soon as April 2022

EconomyOct 27, 2021 12:47PM ET
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© Reuters. FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) -The Bank of Canada signaled on Wednesday it could hike interest rates as soon as April 2022 and said inflation would stay above target through much of next year, due to higher energy prices and supply bottlenecks.

The central bank held its key overnight interest rate at 0.25%, as expected, and said it was ending its bond-buying program, citing Canada's robust economic growth, high COVID-19 vaccination rates, and strong employment gains.

"We now expect slack to be absorbed sooner, and that signals that we will be considering raising interest rates sooner than we previously thought," Bank of Canada Governor Tiff Macklem told reporters in Ottawa after the rate decision.

He later added: "So if you want it in months, some time between April and September."

The Bank had previously forecast a full recovery would happen sometime in the second half of 2022 and that it would keep rates at current levels until that happened.

It made clear the timing was more uncertain than usual because of the challenges of reopening an economy still affected by COVID-19.

"It's a bit of a hawkish surprise," said Andrew Kelvin, chief Canada strategist at TD Securities.

Money markets now see the first rate hike coming in March, compared with April before Wednesday's announcement.

But some economists were less certain, particularly as Canada's economic growth has hiccupped amid pandemic-related challenges and global supply-chain bottlenecks.

"The Bank's GDP forecasts still look too upbeat to us ... so we expect it will wait until the third quarter of 2022 before pulling the trigger," said Stephen Brown, senior Canada economist at Capital Economics.

FULL RECOVERY

The Canadian dollar was trading 0.4% higher at 1.2338 to the greenback, or 81.05 U.S. cents, after the announcement, while the yield on the two-year Canadian government bond touched its highest since March 2020 at 1.147%, before dipping to 1.066%, up nearly 20 basis points on the day.

The central bank also cut Canada's economic growth outlook this year to 5.1% from 6.0% in July. Slower growth coupled with supply-chain disruptions suggest the output gap is narrower than previously thought, it said.

Headline inflation is expected to remain above its 1% to 3% control range for longer than previously thought, the Bank said, easing back closer to target in late 2022. It forecast inflation at 4.8% in the fourth quarter of this year, easing to 2.1% in the fourth quarter of 2022.

"These upward revisions reflect the larger and more lasting impacts from supply constraints as well as higher energy prices," it said.

Those bottlenecks should be largely resolved by the end of 2022, the Bank said.

It said the bond-buying program, used to stem the economic fallout of the coronavirus pandemic, will move into the reinvestment phase on Nov. 1, where it will purchase only enough Canadian government bonds to replace those that are maturing.

Bank of Canada head signals rates could rise as soon as April 2022
 

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