Bank of Canada decision: Bay Street hawks who called for January hike react

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The Bank of Canada balked at calls for an increase to the overnight interest rate in its Jan. 26 policy decision, opting to keep rates on hold but setting the course for hikes, perhaps as soon as March.

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Ahead of the January meeting, some economists advanced their forecasts for liftoff. But after Wednesday’s announcement, they in turn balked at the Governing Council’s latest communication.

Here’s what the hawks had to say:

Jean-François Perrault, chief economist at Bank of Nova Scotia, by phone:

“It’s difficult to see now how they would justify a hike in March, which is the next decision. Really, what information are they going to have that they don’t have now that would compel them to move? Because if anything, in March, you’re going to get the crappier (data) from January, which are obviously affected by Omicron.

“They’re already saying we expect five per cent inflation in the first part of the year, so it’s not like it’s inflation that’s going to drive them to move. So we’re scratching our heads, saying ‘okay, what are the triggers that are going to lead them to raise interest rates and when are those going to line up?’

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“I think they’re behind the curve. I think they do need to move in March but I’m not sure how they’re going to be able to justify that given what they’re saying today.”

Perrault expects a hike to come in March now.

Taylor Schleich, rates strategist at National Bank of Canada, by phone:

“I’m hesitant to call it a policy mistake, but it certainly appears like the bank is on the back foot in the fight against inflation. So I think the more prudent move would have been to increase interest rates today and get that get that fight against inflation started.

“I think the fact that they’re shifting their positioning is more important than the fact that they abandoned their guidance multiple times. They’re adapting to the inflation outlook. Inflation has been stronger than we thought. As a central bank with price stability as their primary mandate, you should expect them to do that. So it’s a good thing.

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“Where it becomes a little bit trickier is if inflation just continues to surprise to the upside. If you look at the trajectory for their inflation forecasts in 2022, it continued to be marked up and up and up. So I think the bigger risk is that inflation continues to rise and the bank is behind the curve and Canadians question how effective the bank is at taming inflation.”

Schleich expects a hike to come in March now.

Veronica Clark, economist at Citigroup Inc., in a note:

“The decision was surprising to us, although it does not change the general trajectory for higher rates over the year. Failing to raise rates in January could mean a faster-than-quarterly pace of hikes will be warranted, as there is less flexibility to be gradual now.

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“The BoC still seems very focused on controlling inflation, as governor (Tiff) Macklem stressed in the press conference, and thus it seems strange to us to fail to raise rates when all the previously outlined requirements for a hike are met.

The risk they run with every meeting they wait is that they’ll start to lose credibility on their inflation mandate

Andrew Kelvin

“Still, we struggle to see what waiting one more meeting will practically do to support the recovery. If anything, it increases the risk of needing to raise rates faster which could be more destabilizing.”

Clark expects a hike to come in March now.

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Andrew Kelvin, chief Canada strategist at Toronto-Dominion Bank, by phone:

“It was a tough call. They will need to lift rates soon and as long as they lift rates in March, they can get out of this with their credibility as it relates to inflation targeting fully intact. But, I would emphasize the economy is ready for rate hikes.

“The risk they run with every meeting they wait is that they’ll start to lose credibility on their inflation mandate and that’s a much more significant risk for them.

“In the grand scheme of things, liftoff between January or March hopefully doesn’t make a big difference. I’m just a little bit wary of the potential for an even hotter spring housing market to start to weigh on consumer sentiment — these sorts of things. I feel like it was a missed opportunity to concretely get out ahead of the inflation story for the Bank of Canada. I think it will make their communications job a little more challenging down the road.

“There was this sort of incongruity between the Bank of Canada talking about how they have made significant change in their policy stance and the fact that they didn’t actually change their policy stance.”

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