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.