RBC:
The BoC opted against raising its benchmark policy rate today in what was likely a close call. Markets were looking for a hike but consensus tilted toward a steady rate decision in line with our call. Recent economic data—particularly robust jobs numbers and a Business Outlook Survey littered with references to capacity and price pressures—make a strong case that a near-zero overnight rate is no longer needed. And upward revisions to the BoC’s inflation forecasts (now expected to average 4.2% in 2022) argue against too much patience in getting a tightening cycle underway.
But the BoC decided to use today’s meeting to tee up forthcoming rate increases, noting that its forward guidance condition has been met (i.e. economic slack has been absorbed) and clearly indicating upcoming meetings are ‘live’ for rate hikes. The fact that its next meeting is a short five weeks away may have contributed to the BoC’s patience. While it said Omicron is likely to be less economically damaging than past waves (Q1 GDP seen slowing to 2%) the bank should become more confident of that in the coming weeks. Holding steady today also allows for a more graceful exit from its forward guidance than if the BoC hiked in January after reiterating its “middle quarters of 2022” guidance in December.
Our call has been for the BoC to begin raising rates in April, though three months looks like a long time when the economy is already at full capacity and inflation is expected to remain elevated over the first half of the year. The BoC has made it clear that rate hikes are coming and likely wants to send a message to Canadians—sooner rather than later—that it is acting to control inflation. Our forecast has been for three rate hikes this year though we see upside risk to that call if the BoC does get an earlier start. That said, we continue to think the market is over-priced for more than five rate increase in 2022 and the BoC’s patience today increases our confidence that the central bank won’t be overly aggressive in its pace of tightening. The BoC also indicated that, once it begins to raise rates, it will consider exiting the reinvestment phase of QE and begin shrinking its balance sheet. We think such a move could come in the first half of this year, though we’d emphasize that most tightening in financial conditions will come from the BoC raising its policy rate, not shrinking its balance sheet
ING:
Going into today’s meeting, we thought the chances were good for a 25bp rate rise. Admittedly, only a third of economists predicted it would happen, but financial markets were more confident with it roughly 70% priced. After all the economy is booming, jobs are at record highs, inflation is at 30-year highs and Covid containment measures are starting to be eased.
We expect the first interest rate now to come at the March 2nd policy meeting. The BoC acknowledged overall “economic slack [is] now absorbed” and that “the labour market has tightened significantly”. Furthermore, the BoC’s own latest quarterly survey showed investment and hiring intentions are at record highs, which is consistent with our own GDP forecast of 3.5% for 2022 after 4.5% in 2021.
We are also less confident that inflation will fall as quickly as the BoC expect given supply chain strains and labour market shortages are showing little sign of easing. Consequently we see at least four rate rises in 2022 with the risks skewed towards the need for more aggressive policy tightening.
Markets had to price out today’s rate hike (which had around 70% of implied probability), which inevitably sent USD/CAD higher. However, the knee-jerk reaction in the pair saw the pair stall around 1.2640, indicating that there is not a strong appetite to turn bearish on CAD simply on the back of the BoC policy outlook. After all, the BoC statement clearly paves the way for a rate hike in March, which means that the prospect of five rate hikes in 2022 currently priced in by the market remains quite intact.
We continue to see the BoC tightening cycle as a positive factor for CAD in 2022, although external factors will play a big role too in directing the currency from now on. Assuming oil prices remain resilient and the global risk sentiment picture stabilises after the recent jitters, we think USD/CAD can stay on a downtrend for the rest of the year and hit 1.22 in 4Q22.
TD Securities:
This was always going to be a close call. Markets were priced for a hike, but the BoC decided it needed to move in a methodical fashion. It did this by stating that overall slack caused by the pandemic has now been absorbed and that it would end its exceptional level of forward guidance. In other words, it is now ready to hike.
Even with growth being impacted by omicron, inflation should be the main concern for the Bank. Consumer prices are growing at 5% and financial imbalances (housing) continue to rise on the back of low interest rates. From our lens, the BoC needs to move quick. We expect a rate hike in March and three more in 2022. This should lift government bond yields and mortgage rates. Hopefully this will cool some of the froth.
Canada 2-year and 10-year yields are down 7 basis points and 10 basis points, to 1.17% and 1.77%, respectively. The loonie is flat at 79 U.S. cents. With the Fed on deck to make its interest rate announcement at 2pm today, we could see some spillover into Canadian markets.
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