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Bank of Canada Expected to Hike Rates Tomorrow as Inflation Soars, Economy Robust

Published 2022-03-01, 05:09 p/m
Updated 2022-03-01, 05:35 p/m
© Reuters.

© Reuters.

By Ketki Saxena

Investing.com -- The Bank of Canada is widely expected to raise interest rates tomorrow, as Canadian CPI (consumer price index) continues to soar, hitting 5.1% - or a 30 year high in January. Keeping inflation under control (i.e. at or under 2.0%) is the BoC’s primary mandate, and raising rates one of the main tools it has to control rising costs.

Meanwhile, the economy has demonstrated strong growth and resilience to the Omicron Variant, undercutting the Bank’s primary rationale for delaying rate hikes. Earlier today, Statistics Canada reported GDP growth for the full year 2021 at 4.6 %, with the Canadian economy staging a strong recovery from the 5.25% decline in 2020 during the onset of the COVID-19 pandemic.

Q4 2021 GDP growth grew at an annual annualized rate of 6.7%, demonstrating the Canadian economy’s strong resilience to the Omicron variant of the Coronavirus. Analysts had predicted that this most recent wave of the virus would have a lesser effect on the economy than the initial and Delta variant.

In a press conference two weeks ago, BoC Deputy Governor Timothy Lane also seemed to strongly indicate rate hikes upcoming tomorrow, stating that the BOC would need to be nimble and if necessary, forceful” in tackling inflation. The bank announced that inflation is expected to be more persistent than previously forecast - as it has done in nearly every recent announcement.

If the BOC does raise rates tomorrow, it will be the first time since March 2020 that the Bank’s policy rate rises above the Extreme lower bound (ELB) of 0.25% - the lowest possible level that the central bank can drop rates to.

While analysts by all of Canada’s big 6 banks expect the first of many hikes this year to be announced tomorrow, rate hikes were also widely expected (but ultimately failed to materialize at the BOC’s last monetary policy announcement on Jan 26.)

Canada’s central bank may surprise markets and disappoint investors again tomorrow if it does not raise rates.

Some analysts, such as at the Laurentian Bank, expect that rate hikes may not be as aggressive as generally anticipated by the market, due to factors such as imbalanced levels of household and corporate debt. Canadian households have added $51.6 billion of debt in the third quarter of 2021, a near-record high, with mortgages accounting for the majority of debt. The debt-to-disposable income ratio for the average Canadian is now at 177.2 %, indicating that Canadians owe $1.77 for every dollar they earn.

The market uncertainty precipitated by the Russian invasion of the Ukraine, particularly if it is long drawn out, may be a factor for Central Banks to raise hikes at a slower pace than originally planned, in order to soften the sell-off in equity markets.

A move tomorrow by BOC governor Tiff Macklem could also be relatively bold, given that a raise in BOC rates ahead of the Fed typically lead to the Loonie rising against the greenback at an exacerbated pace, which leads to Canadian exports becoming more expensive than usual.

The Fed is anticipated to raise rates later this month, with some analysts calling for an aggressive 50 basis-point move by the Fed.

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