Canada

The Bank of Canada Didn’t Raise Rates, It Raised Its Inflation Forecast

It’s only January, but Canada’s central bank has already given up on its New Year’s resolution. As forecast, the Bank of Canada (BoC) held its overnight rate in today’s announcement. However, it was an odd move considering how hot inflation has been running. The reason is actually pretty straightforward — the central bank is embracing higher inflation. The latest monetary policy report accompanying the announcement shows a big upward revision. 

The Bank of Canada Is Fueling A 30-Year High For Inflation

Controlling inflation is the central bank’s mandate — they literally lead with that on their website. Their primary tool for doing this is by influencing credit demand via the overnight rate. As inflation climbs above their target, they raise rates to slow credit growth. If credit growth slows, so does purchasing and demand, which means falling prices. 

The latest CPI inflation data shows its hit the highest level in three decades. Annual growth reached 4.8% in December, a 30-year high for the headline. Naturally it was reasonable to expect a rate hike today to get CPI back down to the 2.0% target rate. For some odd reason, the BoC is now completely ignoring its mandate. They’ve gone so far as to even discredit their own data to support non-mandate priorities.

Bank of Canada Raised Inflation Forecast Instead of Rates

Instead of raising rates to cool inflation, Canada’s central bank raised its inflation forecast. The BoC CPI estimate reached 4.2% for 2022, which is a notable jump from the 3.4% previously expected. It’s also more than double the target rate of 2% they should have been working towards. The central bank recently found out most businesses no longer believe the BoC can control the monetary supply. This presents a significant concern when attracting investment to Canada.

No Reason To Hold Rates Except “Geopolitical” Concerns

Over the past few weeks, economists have struggled to understand why rates won’t rise. Canadian employment is solid, with the unemployment rate well past full employment. The latest variant is proving less concerning than it was previously believed to be. Home prices are, well, Canadian home prices. The only concern one bank saw is geopolitical tensions in Ukraine. That happened to be one of the point’s the BoC brought up today, though they declined to specify where.

The BoC is holding interest rates low against all logic and embracing high inflation. It was logical to assume the BoC would execute on its mandate and raise rates. The CEO of Canada’s largest bank even sounded the alarm on the low-rate policy. Another bank warned rates should have been raised a year ago. It’s definitely odd to see them pass on the opportunity to hike the overnight rate.

Though that wasn’t the consensus opinion we found. We polled Canada’s most prominent figures in economics and finance, and no hike was the general sentiment. None appear to doubt the strength of the economy, just the BoC’s ability to act.

23 Comments

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  • C.Rose 4 months ago

    I repeat…
    I can’t believe that interest rates will be at a high of 1.5% at the end of the year with inflation at 5%
    … talk about being way behind the curve. Political pressure for sure. BoC balance sheets stands at 434 billion- 350 billion more then before the pandemic- unbelievable!!! The printing presses are working overtime. Get use to runaway inflation!

  • Sam 4 months ago

    Let inflation run wild while stoking housing prices…….

    The BOC works for the Banks. Average working Canadians are expendable.

  • fred 4 months ago

    After all their bluffs , they did nothing , when they cut , half a percent and %1.5 in one month ,
    but,….

    March 3rd, 2020 1.25% -0.5
    March 15th, 2020 0.75% -0.5
    March 26th, 2020 0.25% -0.5

  • Ike 4 months ago

    It’s as if they are not allowed to cool the housing market

    • iamdman 4 months ago

      Trudeau and Tim haven’t sold some if their homes and cottages yet. Once they are sold they will raise the rates.

    • expat 4 months ago

      Right? Let’s just keep defying logic and see how it all works out.

      I think it’s a notice to get the big money somewhere safe now.

  • Busrider 4 months ago

    This was telegraphed when Freeland released the so-called update to monetary policy. They didn’t change anything on paper, despite everyone knowing by then inflation was back for good and the only reason to keep rates where they were/are are social ones (which you would be rational in assuming was the purview of fiscal policy). But the real change went unstated; if the Bank of Canada won’t acknowledge inflation in the face of it, they are being negligent or deliberately targeting something else. They just couldn’t say as much in the update. To change it would have implied they had previously veered from the mandate.

    TLDR The BofC is doing this on purpose

  • Gerry 4 months ago

    Everyone is happily partying on the train as it speeds towards the end if the track…

  • Mara 4 months ago

    This is the trend in all developed countries: high inflation, low mortgage rates that entail high real estate prices. Why do we see Canada being the first to break this pattern?

    • Gerald Haw 4 months ago

      That’s incorrect. Most high growth developed economies are trying to fight deflation and home prices aren’t nearly as high. When a Canadian says “all developed countries,” what they mean is they looked at the US and UK.

  • Oldguy 4 months ago

    I have been arguing for years that the government was slowly playing every card in its hand and that the inevitable result would be that it would have to encourage high inflation in order to devalue its debt without killing the housing bubble. The Covid mess has made it easier to meet its objective by causing inflation and now the liberals just need to ride the wave. The only other ingredient that was needed is unfettered money laundering and that has now become an accepted part of the Canadian fabric.
    This is now a third world economy, run by crooked politicians and their oligarch friends. This is not an accident; it was always the plan.

  • Sam 4 months ago

    I get that raising rates would have a profound impact on households that are already over-leveraged due to having to rent or buy a home that costs 50% of their income.

    It’s egregious that this situation was allowed to devolve in the first place.

    It’s worse that no one is thinking that future generations and just letting the situation devolve further.

    I’m a GenXer. The GenZer’s will be the ultimate lost generation.

  • Sam 4 months ago

    Addicted to cheap liquidity. The whole market antsy sitting on pins & needles wondering if the BoC will raise 25 points…… 1/4 of 1 percent.

    1/4 of 1 percent…..and everyone cries foul. 1/4 of 1 percent ….. and Tiff can’t even bring himself to do that lest he throw the whole market into a violent taper tantrum……

    1/4 of 1%……addiction sucks…..I guess no one wants cold turkey rehab…It’s Monetary Policy Methodone moving forward.

  • Chris P. 4 months ago

    Say you saved into RRSP for the last 30 years and now you are 50. If this inflation continues,
    by the time you retire, the purchasing power of the savings will be half of what it is now.
    There are millions of Canadians with RRSPs and yet noone poses this
    question to the BoC or the Prime Minister or minister of finance.
    Officially one just looses 5 cents on a dollar and who cares about 5 cents?!

    • Manny 4 months ago

      exactly, I think THE question need to be asked. May be start a petition for pete’s sake.

  • Arthur 4 months ago

    Governor Macklem is working on his early retirement package rather than doing what is fit and proper – resigning for past, current and planned future FAILURE!

  • C.Rose 4 months ago

    I can’t believe that interest rates will be at a high of 1.5% at the end of the year with inflation at 5%
    … talk about being way behind the curve. Political pressure for sure. Get use to runaway inflation!

  • expat 4 months ago

    I’ve always known this government will go down on any corporate money, but now they’re gagging themselves on it.

    Crude, I know, but truly the only fitting metaphor I could think of.

  • M W 4 months ago

    You’ll forgive them if they don’t think about monetary policy.

  • neil 4 months ago

    There was never any chance of the rates going up today. They’ll raise 25 points in march then probably a total of 75 bps by the end of the year. They aren’t likely to completely unwind the emergency cuts for covid until early next year, then they can get back into the upward trajectory we were in before covid hit. That’s assuming there isn’t another shock on the horizon.

    They know they’ve painted themselves into a corner with more than a decade of free money and raising too fast will cause shocks so they’ll continue raising slowly and hoping for the best.

    A soft landing seems like a pipe dream at this point but you never know. Stranger things have happened. The next few years should be interesting to watch!

  • Commonsense 4 months ago

    What do you mean no one knows? The question is who benefits; that’s where you answer lies.

  • Woolsock 4 months ago

    Maybe they’re keen on one last trip to the (probably poisonous) sacred well of Canadian wealth production – the spring housing market.

    Still, what government wants to pop this and finally tell people they’re not – despite what they may have been told – “richer than they think”. Wait long enough and inflation will do that for them. What a fun plan.

  • Blu Dot 4 months ago

    Officials of the Bank of Canada and the Canadian Federal Government should be investigated for criminal collusion with the real estate industry

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