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Bank of Canada holds interest rates for now, but signals hikes to come

Click to play video: 'Bank of Canada holds interest rate steady amid rising inflation, warns hike is on horizon' Bank of Canada holds interest rate steady amid rising inflation, warns hike is on horizon
WATCH: The Bank of Canada will hold its trendsetting interest rate steady at 0.25 per cent amid surging inflation, Governor Tiff Macklem said Wednesday. However, he warned that interest rates will need to rise in order to reduce inflation – Jan 26, 2022

The Bank of Canada kept its trendsetting interest rate at rock-bottom levels on Wednesday, holding off on planned increases aimed at controlling surging inflation but signalling rate hikes are not far off.

The central bank’s overnight rate remains at 0.25 per cent, a rate it adopted in a drastic drop in the early days of the COVID-19 pandemic.

Click to play video: 'Bank of Canada holds interest rates for now, signalling hikes to come' Bank of Canada holds interest rates for now, signalling hikes to come
Bank of Canada holds interest rates for now, signalling hikes to come – Jan 26, 2022

Governor Tiff Macklem acknowledged in comments Wednesday morning that inflation, which hit a 30-year high at 4.8 per cent in December, is “uncomfortably high.” He said interest rates will need to rise to keep escalating prices under control.

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Read more: ‘Pressing need’ for Bank of Canada to raise interest rates amid inflation surge

The bank removed its previous commitment to keep interest rates at the floor, with Macklem signalling to Canadians and markets that interest rates are now on a “rising path.”

He said the central bank held off on increasing rates immediately in January in part because Omicron is a “wild card” that’s expected to drive spending lower in the first quarter of the year.

The bank expects the impact of Omicron on the Canadian economy to be milder than previous waves, however, owing to both the country’s relatively high vaccination rate and consumers’ and businesses’ ability to adapt to the new variant nearly two years into the pandemic.

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Credit experts warn Albertans to get ‘financial house in order’ before interest rates rise – Jan 26, 2022

CIBC chief economist Avery Shenfeld said he expects the Bank of Canada to raise rates in March if the country gets better news about the Omicron variant.

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Read more: B.C. has recorded 66 cases of the Omicron subvariant, province confirms

The U.S. Federal Reserve also signalled Wednesday that it plans to begin raising its benchmark interest rate as soon as March.

Macklem noted that “emergency policy settings” tied to the COVID-19 pandemic are now over, and the Canadian economy had strong momentum heading into 2022.

The central bank estimates the economy grew by 4.6 per cent in 2021, down half a percentage point from its previous forecast in October, and now projects growth in real gross domestic product in 2022 at four per cent, down from 4.3 per cent.

Click to play video: 'Bank of Canada forecasts annual economic growth in 2022 to be 4%' Bank of Canada forecasts annual economic growth in 2022 to be 4%
Bank of Canada forecasts annual economic growth in 2022 to be 4% – Jan 26, 2022

Inflation will remain high for first half of 2022, bank forecasts

The Bank of Canada didn’t outline the timing or pace of increases in its statement, but the decision to hold off on a first hike will be controversial in financial markets at a time when headline inflation is at a 30-year high, Stephen Tapp, chief economist at the Canadian Chamber of Commerce, told the Canadian Press.

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The central bank wrote in a monetary policy report released alongside the interest rate decision Wednesday that it expects inflation will remain around five per cent for the first half of 2022, citing supply chain constraints and rising food prices.

Click to play video: 'Bank of Canada forecasts inflation will fall to 3% by end of year' Bank of Canada forecasts inflation will fall to 3% by end of year
Bank of Canada forecasts inflation will fall to 3% by end of year – Jan 26, 2022

The central bank expects inflation to fall back down to three per cent by the end of the year and back towards the target rate of two per cent by 2024.

The monetary policy report notes uncertainty is “unusually high” around its latest inflation projections amid factors such as the ongoing pandemic and supply chain issues.

— With files from the Canadian Press, Associated Press

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Navigating the cost-of-living crisis – Jan 25, 2022

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