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Bank of Canada holds on rates, warns of elevated inflation

BNN Bloomberg | Theophilos Argitis | De 8, 2021

Canadian dollar - Bank of Canada holds on rates, warns of elevated inflation

The Bank of Canada kept borrowing costs unchanged, but highlighted strength in the labor market and worries about the persistence of inflation that will likely keep expectations of imminent interest rate hikes intact.

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In a statement-only decision Wednesday, policy makers led by Governor Tiff Macklem left the benchmark overnight rate unchanged at 0.25 per cent and reiterated the economy continues to require considerable monetary policy support.

Still, officials dropped a reference to inflationary pressures being temporary, and noted recent job gains have been broad-based with the employment rate returning to pre-pandemic levels.

While the language changes from the previous decision were incremental, there’s nothing in the statement that’s likely to derail investor expectations that the Bank of Canada is about to embark on an aggressive campaign of rate hikes.

“Inflation is elevated and the impact of global supply constraints is feeding through to a broader range of goods prices,” according to the statement, which added that “recent economic indicators suggest the economy had considerable momentum into the fourth quarter.”

The Bank of Canada is at the forefront among Group of Seven central banks in slowing its stimulus efforts.

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In October, it ended its bond-buying stimulus program and accelerated the potential timing of future rate increases amid worries that supply disruptions are driving up inflation. Markets are pricing in rate hikes in Canada next year at a faster pace than the Federal Reserve, which has yet to end its quantitative easing program.

“Slightly hawkish, but non-committal,” Simon Harvey, senior FX market analyst at Monex Europe Ltd., said by email.

“We continue to expect a go-slow approach as the pandemic fades, subject to inflation developments. Our baseline remains liftoff in April and a total of three hikes next year, each of 25 basis points.” -- Andrew Husby, economist

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