By Julie Gordon and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada on Wednesday held its key overnight interest rate at 0.25%, as expected, and maintained its guidance that it could start raising borrowing costs as soon as April of 2022, tamping down market hopes of an earlier move.
The central bank, in a regular rate decision statement, also said “devastating floods” in British Columbia last month, which cut off access https://www.reuters.com/markets/commodities/good-news-last-flood-hit-canadian-province-some-rail-services-restart-2021-11-19 to the country’s largest port, and the emergence of the Omicron coronavirus variant could slow economic activity.
“(This) could weigh on growth by compounding supply chain disruptions and reducing demand for some services,” it said.
The Canadian dollar was trading 0.2% lower at 1.2660 to the greenback, or 78.99 U.S. cents, after the decision, pulling back from its strongest level in nearly three weeks.
“Some in the market were looking for a signal of an imminent rate hike and that’s conspicuously absent. As a result, the Canadian dollar dipped on the decision,” said Adam Button, chief currency analyst at Forexlive.
Economists said the Canadian central bank was likely buying time until its January meeting, when it will update its economic forecasts, to get a clearer view of how Omicron and the B.C. flooding will impact economic activity.
“For now, I think it’s a waiting game until the January forecasts as we assess more information on Omicron,” said Derek Holt, vice president of capital market economics at Scotiabank.
Still, the central bank noted that recent data suggested Canada’s economy had “considerable momentum” going into the fourth quarter, with job vacancies high and wage growth picking up.
It said it continued to expect inflation to remain elevated in the first half of 2022, easing back to the Bank of Canada’s 2% target in the second half of the year.
Headline inflation has been above the central bank’s 1%-to-3% control range for seven months, as global supply chain bottlenecks and high energy prices fueled price acceleration.
“The Bank of Canada is getting ready to rumble (on inflation),” said Avery Shenfeld, chief economist at CIBC Capital Markets, noting that the central bank’s language “hints that an April move is in the cards.”
The Bank of Canada reiterated on Wednesday that it expects economic slack to be absorbed in the middle quarters of 2022.
Money market rates eased between 8 and 10 basis points after the decision, with the market expecting the first hike in March or April, and five increases in total next year. [BOCWATCH]
(Additional reporting by Steve Sceherer in Ottawa and Fergal Smith in Toronto; Editing by Jonathan Oatis and Paul Simao)
