Experts react to the Bank of Canada raising rates for the first time since 2018

March 3, 2022 | Livabl

In its second policy rate announcement of 2022, the Bank of Canada opted to hike its target for the overnight rate by 25 basis points to 0.5 per cent. Economists and industry experts are reacting to the bank’s decision, which marks the first increase to the mortgage-influencing overnight rate since October 2018.

At the onset of COVID-19, the BoC made three emergency cuts to the overnight rate in March 2020, bringing it down from 1.75 per cent in a matter of weeks as the pandemic sent shockwaves through global markets. The overnight rate has stayed at a quarter percent until now.

In it’s announcement, the BoC stated that Canada’s economic growth has been strong, rising 6.7 per cent in Q4-2021, higher than what the bank had projected and an affirmation that “economic slack has been absorbed.” With the rebound from the Omicron variant underway, household spending is up and is expected to get stronger as more public health restrictions are lifted.

However, the Consumer Price Index for inflation is 5.1 per per cent, well above the BoC’s inflation target of two per cent. The conflict in Ukraine and rising commodity prices could also push inflation higher.

“​​The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty,” said the bank in a press release. “Prices for oil and other commodities have risen sharply. This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth. Financial market volatility has increased. The situation remains fluid and we are following events closely.”

As the economy expands and inflation pressures persist, the BoC expects interest rates will need to increase further. The next overnight rate target announcement is scheduled for April 13th, 2022.

Livabl has rounded up some of the reactions and commentary from industry experts on the BoC’s rate decision.

RBC Economics

Josh Nye, senior economist at RBC Economics, said in a daily economic update that there “appeared to be a low bar to raise rates,” after a close call in January. Although January’s job numbers weren’t positive, Nye pointed out that the labour market has bounced back following previous COVID-19 waves and GDP is growing. Further inflation increases ​​are likely in light of rising food and energy commodity prices as a result of the Russia-Ukraine conflict.

“The BoC will have to weigh additional inflationary pressure brought on by that conflict against two-way domestic impacts (increased revenue for commodity producers, higher prices for consumers) and concerns about the global economic outlook.

Central banks would normally look through geopolitically-driven commodity price pressures, but with inflation already so far above target the BoC has said it is more concerned about upside risks to inflation than downside. Indeed, it said ‘persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards.’

In addition to inflation expectations, the bank will be keeping an eye on financial conditions. Government bond yields have fallen amid growth concerns and rising risk aversion, but corporate credit spreads have widened. Other financial channels have been fairly steady—the Canadian dollar has been in a tight range over the past month and the TSX has held up well relative to other equity markets.

At this early stage, we don’t think geopolitical developments preclude a follow-up hike in April, nor do they argue for the more aggressive tightening path that markets continue to price.”

Bank of Montreal (BMO)

According to Benjamin Reitzes, managing director of Canadian rates and a macro strategist at BMO, another rate hike could be on the cards next month. If global conditions “don’t deteriorate massively,” April could bring about another 25 basis points.

“On the domestic economy, the tone was quite upbeat following yesterday’s better than expected Q4 GDP report. There was solid momentum heading into 2022, and the year started stronger than anticipated as well. That means ‘first-quarter growth is now looking more solid than previously projected.’ The Bank noted strength in housing, household spending, and trade, and sounded confident employment will rebound from January’s Omicron-induced slump.

The Russian invasion of Ukraine ‘is a major new source of uncertainty.’ The Bank sees an upward inflationary impact, while the hit to confidence and new supply issues ‘could weigh on global growth’. There’s plenty of uncertainty there and the BoC will be watching closely.

Assuming the economy maintains its forward trajectory and inflation stays hot (little doubt there near-term), the BoC ‘expects interest rates will need to rise further.’ That’s consistent with the rate hike path narrative and our expectation for another 25 bp rate hike at the April meeting. Meantime, there were no changes on the balance sheet front, though policymakers are looking at ending reinvestment and QT.”

TD Economics

As “widely expected,” the BoC chose to hike the overnight rate today, stated senior economist James Orlando with TD Economics. That said, the bank’s policy path isn’t fixed, and reassessment may be needed as the Russia-Ukraine conflict plays out.

“It finally happened. The BoC has lifted its policy rate, likely setting in motion a series of interest rate hikes over the next several months. With employment likely to show a strong rebound next week and inflation continuing to ratchet higher, the need for higher rates is self-evident.”

“The Bank of Canada’s policy path isn’t set in stone. The Russia/Ukraine conflict is causing financial conditions to tighten. Should the spillover become more entrenched, further tightening may need to be reassessed.”

CIBC Capital Markets

CIBC Capital Markets’ ​​managing director and chief economist, Avery Shenfeld, stated that data reinforcing the economy’s improvement from Omicron and stronger-than-expected growth may be why the BoC chose to boost the overnight rate now and not in January.

“So why now and not back in January? The key is that unlike two months ago, the Bank can now point to data showing that ‘the rebound from Omicron appears to be well in train’ and that would presumably include both evidence from declining hospitalizations, but also the news of a full reopening in previously shuttered or capacity-limited services.

Moreover, the economy has proven to be a bit more resilient to Covid’s impacts, aside from the jobs decline in January that looks likely to be reversed by March. The Bank described both Q4 and projected Q1 growth as stronger than they expected, and sees inflation also set to top their last forecast. The only real cloud mentioned on the growth front was the Ukraine war, which is seen as [a] ‘new source of uncertainty’ that will be ‘followed closely,’ but also as a lift to inflation.

If we have a slight critique of the Bank’s approach to getting going on a tightening cycle, it would be about today’s decision to continue reinvesting maturing Government of Canada bonds in its portfolio into new securities.

We see no obvious logic in helping the bond market hold down yields through such purchases, while simultaneously trying to raise interest rates by lifting the overnight rate. Why push and pull at the same time? Perhaps it wants to use the opportunity afforded by April’s Monetary Policy Report, and the formal press conference that accompanies its release, to lay out the details of its quantitative tightening strategy.”

In an email statement, James Laird, co-founder of and president of CanWise Financial mortgage brokerage, explained that the BoC is pleased with Canada’s economic growth and the labour market. The bank generally feels that “COVID-19 is behind us, at least for the moment,” he said, but inflation remains a concern.

“​​The Bank’s biggest concern is inflation, which came in at 5.1 percent for January, and is expected to climb further due to rising commodity prices, driven by the conflict in Europe. The Bank seems confident that they can get inflation back down to their target of 2 percent by using further rate hikes in the coming months and reducing holdings of Government of Canada bonds.

The expectation is that by the end of this week, all banks and mortgage lenders will announce that their prime lending rates have increased by 25 basis points. Once this occurs, Canadians with variable-rate mortgages and home equity lines of credit (HELOCs) will feel an immediate impact. This group should also budget for further rate increases throughout this year.

Anyone who currently has a fixed-rate mortgage will not be affected until their next renewal date, at which point they should expect higher rates. Those shopping for a home should make sure they get pre-approved in order to hold today’s fixed rates for 120 days.”

BCREA Economics

In an Economics Now email update from the British Columbia Real Estate Association (BCREA), chief economist Brendon Ogmundson said that there is more unpredictability in the market now compared to when the bank started out on its tightening cycle. The recent Russian invasion of Ukraine adds a “new source of uncertainty to the global economy.”

“The Bank must now contend with inflation and inflation expectations that are much higher than the Bank is comfortable with, while also monitoring the potential impact of the Russian invasion of Ukraine on financial markets and commodity prices.

While we expect the Bank will continue to tighten, ultimately bringing its overnight rate to 1.75 per cent by early 2023, there is clearly more uncertainty in the global economy now than when the Bank decided to embark on this tightening cycle. That uncertainty is already being reflected in long-term Canadian interest rates, with the once rapidly ascending five-year Govt of Canada bond yield falling about 30 basis points in recent days.”