In its third scheduled policy decision of 2022, the Bank of Canada took direct aim at inflation by increasing its overnight benchmark rate to 1% from 0.50% in March. As a result, the Bank Rate rises to 1.25% from 0.75%, and borrowing costs for Canadians will rise again.

Deputy BoC Governor Sharon Kozicki told an audience of central bankers in San Francisco last month that the Bank was “prepared to act forcefully” to combat inflation and provided a strong hint that as much as a half a percentage point increase was on its way in April. Even so, this is strong medicine and marks the first time in 22 years that the overnight rate moved up by 50 basis points in one fell swoop.

The BoC also announced it is ending what it calls its reinvestment phase, during which it added Government of Canada bonds to its balance sheet. Effective April 25th, it will begin quantitative tightening and maturing Government of Canada bonds will no longer be replaced.

In rationalizing these moves, the Bank singled out the invasion of Ukraine by Russia as a “new economic uncertainty” that is causing supply disruptions, exacerbating ongoing supply constraints, and “weighing on activity.”

These are the other highlights of today’s announcement.

• Canadian economy and the housing market
• Economic growth is strong and the economy is moving into excess demand
• Labour markets are tight, and wage growth is back to its pre-pandemic pace “and rising”
• Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices
• While the COVID-19 virus continues to mutate and circulate, high rates of vaccination have reduced its health and economic impacts
• Growth looks to have been stronger in the first quarter than projected in January and is likely to pick up in the second quarter
• Consumer spending is strengthening with the lifting of pandemic containment measures
• Exports and business investment “will continue to recover, supported by strong foreign demand and high commodity prices”
• Housing market activity, which has been exceptionally high, is expected to “moderate”

Canadian inflation and the impact of the invasion of Ukraine

• CPI inflation of 5.7% is “above the Bank’s forecast in its January Monetary Policy Report (MPR),” driven by rising energy and food prices and supply disruptions, in combination with strong global and domestic demand
• Core measures of inflation have all moved higher as price pressures “broaden”
• CPI inflation is now expected to average almost 6% in the first half of 2022 and remain well above the control range throughout 2022 before easing “to about 2.5% in the second half of 2023” and returning to the Bank’s 2% target in 2024
• There is an increasing risk that expectations of elevated inflation could become entrenched
• The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations “well-anchored”

Global economy

• The war in Ukraine is disrupting the global recovery, just as most economies are emerging from the impact of the Omicron variant of COVID-19
• European countries are more directly impacted by “confidence effects” and supply dislocations caused by the war
• China’s economy is facing new COVID outbreaks and an ongoing correction in its property market
• In the U.S., domestic demand remains “very strong” and the US Federal Reserve has clearly indicated its resolve to use its monetary policy tools to control inflation
• As policy stimulus is withdrawn, U.S. growth is expected to moderate to a pace “more in line with potential growth”
• Global financial conditions have tightened and volatility has increased such that the Bank now forecasts global growth of about 3.5% in 2022, 2.5% in 2023, and 3.25% in 2024

Looking ahead

The Bank forecasts that Canada’s economy will grow by 4.25% this year before slowing to 3.25% in 2023 and 2.25% in 2024. It is the Bank’s view that “robust business investment, labour productivity growth and higher immigration” will add to the economy’s productive capacity, while higher interest rates “should moderate growth in domestic demand.” Given that the Bank is ending quantitative easing, the size of its balance sheet can be expected to decline over time.

Are more interest rate increases in store this year?

The last word on this topic goes to the Bank’s Governing Council: “With the economy moving into excess demand and inflation persisting well above target…interest rates will need to rise further.”

The timing and pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving its 2% inflation target.

BoC’s next scheduled policy announcement is June 1, 2022. We will update you following that announcement and as always, you can find other important capital market insights on the Resources page of this website.