Bank of Canada drops "temporary" reference on inflation

The Bank of Canada left its benchmark interest rate unchanged on Wednesday, but is no longer calling the forces pushing up inflation temporary.

It continues to expect inflation to remain elevated in the first half of 2022 and ease towards 2 per cent in the second half of the year.

The change in language follows the U.S. Federal Reserve’s decision to drop the word ‘transitory’ in reference to inflation.

The announcement comes on the heels of stronger than expected GDP growth and a hotter than expected job market.

“Recent economic indicators suggest the economy had considerable momentum into the fourth quarter,” said the Bank of Canada in a release.

“This includes broad-based job gains in recent months that have brought the employment rate essentially back to its pre-pandemic level. Job vacancies remain elevated and wage growth has also picked up.”

Omicron and B.C. floods add uncertainty

But the Bank of Canada says Omicron is having early effects.

“The new Omicron COVID-19 variant has prompted a tightening of travel restrictions in many countries and a decline in oil prices, and has injected renewed uncertainty,” it said.

“Accommodative financial conditions are still supporting economic activity.”

It says the new variant and the B.C. floods could compound supply chain disruptions and weigh on growth.

Despite the uncertainty, CIBC chief economist Avery Shenfeld says he’s looking for 150 bps in total hikes, divided equally over 2022-23.

“The Bank of Canada is getting ready to rumble, signalling that its fight against sustained inflation will commence with interest rate hikes in the middle two quarters of the year, but with language that hints that an April move is in the cards.”

The Bank of Canada says housing activity has been moderating but is regaining strength, notably in the resale market.

U.S. Federal Reserve first

The Bank of Canada moved before the U.S. Federal Reserve to wind down its asset purchase program.

But Conference Board of Canada economist Sasan Fouladirad, says despite a labour market that’s recovering faster than the U.S., The Bank of Canada will not raise rates first.

“Canadian household debt is on average much higher than the U.S, which will prompt the Bank to think twice before raising rates too soon,” he said.

“Besides, Canadian real estate demand and prices have remained stubbornly high. Accounting for the headwinds and tailwinds facing the Canadian economy, we expect the Bank to wait until June next year to raise rates.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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