The Bank of Canada keeps its key policy rate unchanged, but reiterated its timeline for interest rate hikes amid worries over persistent inflation. Anthony Okolie speaks with James Orlando, Senior Economist, TD Bank, about the implications for Canada’s economy.
- Thanks, Anthony. Yeah, it's a situation where the Bank of Canada has reinforced their view that rate hikes are coming. So this meeting was always going to be one of those meetings that kind of sets you up for something to happen next meeting. And next meeting is starting in 2022. And so what they're saying is that get ready for 2022 to be an exciting time period. Because in early 2022, we're expecting rate hikes to be on the table.
- OK, so you expect rate hikes. How many increases are you targeting for next year in terms of rate hikes?
- Yeah, so the Bank of Canada is setting us up for rate hikes to start almost at the beginning of the year-- whether that be March or April, that's sort of a tossup right now. Markets are pricing for a Q1 rate hike right now, with upwards of five happening in 2022. We think five might be a little bit too much, maybe somewhere around three or four is more likely.
But what we're trying to tell clients and what we're trying to make sure everyone is aware is that this is happening pretty soon. And so people, for example, that are tied to that Bank of Canada rate-- so a lot of banking products are tied to it, for example, variable rate mortgages. A lot of people bought houses and decided to go variable because that rate was just so cheap.
That variable rate is very much tied to the Bank of Canada rate, which is tied to prime. Other products like lines of credit-- all those lines of credit where you're getting prime plus or minus a certain percentage point, those are tied to it. And those go up in lockstep with that Bank of Canada policy rate. So that's essentially our view is that people that are tied to that rate should be prepared for that.
- OK, so similar to the Federal Reserve, the Bank of Canada dropped its reference to inflationary pressures as temporary. What's your take on that?
- Yeah, so I think this is a communication challenge. We have very high inflation right now. There's no beating around the bush on that one. Inflation is here, it's high, and it's probably going to be sustained for a lot longer than people have thought. And I think that's what the Bank of Canada wants to make sure everyone's aware of is that when you say something is transitory, or temporary, or whatever you want, you want to make sure people know what to expect how long it's going to last for it.
And I think the challenge was that when you use that sort of language, it made people think that, hey, this is going to go away in a short period of time. And we know that things like supply chains that are actually causing this problem are things that actually last for quite a bit of time-- upwards of two years for supply chain issues to resolve themselves. We saw it in Canada in the past when we had sky high oil prices.
It took a long time for supply to catch up to high demand for oil. And as a result, those high inflationary readings were there for a lot longer. And so I think this is just the Bank of Canada wants to recalibrate expectations-- that the high inflation environment we have right now is likely to persist.
- OK, you mentioned supply chain issues and higher inflation. What are some of the other risks to the Bank of Canada's outlook, at least in the near-term?
- Yeah, so the Bank of Canada highlighted a few things. They added a few different factors that are in their communications today. One is Omicron. That's an obvious one. No one really knows how that's going to play out.
We're sort of looking at the data, looking at cases, and seeing how impactful is this going to be? The spread seems pretty fast. But how severe is the health implications of it? Is it going to put pressure on our hospitals? We know that in Canada, and places like Ontario specifically, is that we don't have a high threshold for being able to have high capacity for cases in hospitals.
And so if you really see this start impacting admissions into ICU or people in the hospital due to COVID, that would potentially lead to more government restrictions, slow down that service recovery that we've been hoping for, and effectively slow down economic growth in Canada. And that really is the crux of everything.
They also mentioned the BC floods, which is only exacerbating some of the supply chain type stuff that we're seeing right now. But the thing is, they mentioned it, they say it's a risk, but they're not really embedding it into the forecast. And they're still saying that the economy is going to recover by the middle quarters of 2022. So what they're saying is that even though these risks are on the table and they're very front and center of people's lives right now, they don't think it's going to derail this recovery and limit their ability to hike interest rates in early 2022.
- What do you see the loonie going over the next little while?
- Yeah, so because we're seeing it we're in a situation where the Bank of Canada is clearly signaling that they're going to be hiking rates in short order, they're going to be leading the Federal Reserve. So they're going to be out in front, they're going to be hiking rates at a fast pace, they're going to be pushing the limits on that. And the Federal Reserve is going to be sitting back being a little bit more patient, because, one, their employment recovery isn't as strong, and, two, they've committed themselves to being more patient.
Remember, it's still doing quantitative easing right now. They might accelerate their taper, but they're still doing quantitative easing. So they're not even in a position to start hiking rates, while the Bank of Canada is. That's going to be something that's going to be pushing up the Canadian dollar temporarily in the short-term in the next few months.
But we think that as the Federal Reserve changes gears, starts accelerating in the latter half of 2022, that will be negative for the Canadian dollar. So maybe some optimism pushing Canadian dollar towards $0.80, keeping it a little bit elevated, but then coming back down in the latter half of 2022.
- James, thank you very much for joining us.
- Thank you.