Bank of Canada to Make Highly-Anticipated Rate Decision

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All eyes will be on the Bank of Canada rate decision next week as pressure builds for policymakers to hike rates sooner than previously indicated. We expect the bank to hold off on a change next week, but in a very close call. Clearly, the conditions are in place to support higher rates. Inflation trends have evolved largely in line with the BoC’s forecasts from the October Monetary Policy Report (4.8% vs actual 4.7% for Q4). But that still represents consumer price growth substantially above the 2% target rate. And our own tracking shows not all of that pressure can be explained away by pandemic-related distortions. Households still appear to have ample purchasing power, with government support programs once again putting a floor under incomes during the latest round of pandemic restrictions. And the Bank’s quarterly Business Outlook Survey showed business capacity pressures and labour shortages intensifying significantly—along with expected inflation and wage growth—ahead of the surge in Omicron cases in recent weeks.

Macroeconomic disruptions from the new virus variant are expected to be significant but temporary, with some regions, including Ontario, already planning to roll back restrictions that were re-imposed in early January. Beyond those near-term virus risks, the BoC is clearly running out of reasons to keep interest rates at emergency low levels. Rates will rise soon, even if the bank only uses next week’s announcement to foreshadow them (as we expect) rather than hiking immediately.

Week ahead data watch:

The December ‘flash’ estimate of Canadian manufacturing sales is expected to show another increase, building on a larger 2.6% gain in November. Manufacturing hours worked ticked up 0.4% and finished auto production rose another 4% (seasonally adjusted) by our count.

Canada’s alternative labour report (SEPH) will likely yet again highlight elevated vacancies, particularly in the hardest hit food and accommodation sector.

No major surprises are expected from next week’s US FOMC meeting. We look for the Fed to raise rates soon, but a change is not expected at the January meeting.

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