Canada Unexpectedly Holds Interest Rate Steady Due to COVID-19 Resurgence

March hike likely... McCallum Governor emphasizes "Base rate to rise soon"

Tiff Macklem, Governor of the Bank of Canada
[Photo by Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] The Bank of Canada (BOC) decided to unexpectedly keep its benchmark interest rate unchanged at its monetary policy meeting on the 26th (local time), citing the resurgence of COVID-19, Bloomberg reported on the same day.

Bloomberg explained that the market had anticipated a 70% probability of a rate hike before the meeting. However, although the BOC postponed the rate hike once, it strongly indicated its intention to raise the benchmark interest rate at the next monetary policy meeting scheduled for March 2.

BOC Governor Tiff Macklem explained at a press conference after the meeting that "the resurgence of COVID-19 was the main reason for choosing to keep the benchmark interest rate unchanged." However, he emphasized that "the impact of the Omicron variant is temporary, and thanks to the high vaccination rate, the shock to the economy will be limited."

Instead, Governor Macklem expressed concerns about inflation, stating, "The economy is expected to reach full employment," and emphasized, "No further economic stimulus measures are necessary, and the benchmark interest rate will be raised soon." The market expects Canada's current benchmark interest rate of 0.25% to rise to 1.75% in one year.

In the quarterly economic outlook report released on the same day, the BOC significantly raised its consumer price inflation forecast for this year from the previous 3.4% to 4.2%. The BOC stated that it revised the forecast upward reflecting persistent inflationary factors such as wages.

Canada's consumer price inflation rate in December last year recorded 4.8%, the highest since 1991. Canada's consumer price inflation rate has been outside the BOC's monetary policy target range of 1-3% for nine consecutive months.

Warren Lovely, Chief Investment Strategist at National Bank of Canada, said, "Except for the rate hike, the BOC has done everything regarding tightening," and added, "It signaled that the rate hike is imminent."

Derek Holt, Vice President of the Bank of Nova Scotia, also diagnosed, "All the inflation forecasts and remarks indicated a rate hike."

Regarding quantitative tightening, the BOC announced that it will reduce its holdings through roll-off. Roll-off means reducing assets on the balance sheet by holding the proceeds from matured bonds instead of reinvesting them and letting the bonds expire. The BOC stated that it will start roll-off only after the rate hikes begin. The BOC introduced quantitative easing policies after COVID-19, during which its holdings increased by more than 330 billion Canadian dollars.

This content was produced with the assistance of AI translation services.