Tiff talks tough

A scheduled appearance before the Senate Banking Committee this week afforded Bank of Canada Governor Tiff Macklem an opportunity to restate the Bank's current policy approach (it's going to tighten) and to explain why it did not start the process in January (omicron). A few highlights.....

Macklem stated that he Bank's current message is threefold:

"First, the emergency monetary measures needed to support the economy through the pandemic are no longer required and they have ended.

Second, interest rates will need to increase to control inflation. Canadians should expect a rising path for interest rates.

Third, while reopening our economy after repeated waves of the COVID-19 pandemic is complicated, Canadians can be confident that the Bank of Canada will control inflation. We are committed to bringing inflation back to target."

The key element here from a policy standpoint is the commitment to get inflation back to the 2 percent target. As in the US, all talk of inflationary pressures being "transitory" has been squelched. Macklem now expects headline CPI to remain near 5 percent through mid-year, slow to about 3 percent by year end and then finally move back "close to" the target in 2023 or 2024. As the Bank made clear in its policy statement in January, achieving even this relatively slow decline in headline CPI will require rate increases. However, it continues to believe that longer-term inflation expectations remain well-anchored to the 2 percent target, though it may be said that even a cursory reading of newspaper headlines would tell a different story on that score.  

If bringing inflation back to target is now the key goal, why did the Bank not start the process with a rate hike in January?  The answer comes down to the impact of the omicron variant, which persuaded the Bank to hold off on an immediate move while signalling strongly that rate hikes were imminent:

"Our approach to monetary policy throughout the pandemic has been deliberate, and we were mindful that Omicron will dampen spending in the first quarter. So we decided to keep our policy rate unchanged last week, remove our commitment to hold it at its floor, and signal that rates can be expected to increase going forward."

An early indication of the impact of omicron will be released on Friday (February 4) in the shape of the January employment data. Market expectations are for the loss of as many as 100,000 jobs in the month, ending a run of several months of solid gains. However, it is very likely that the setback will be  short in duration, as Provinces right across the country have already begun to lift the restrictions that were hastily put in place when omicron arrived. A 25 bp rate hike in March seems certain, with at least three more to follow as the year unfolds.