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Bank of Canada January 2022 decisions
January 26, 2022
7:58 am
Norman1
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Press release Bank of Canada maintains policy rate, removes exceptional forward guidance provides background for today's decision to maintain rates:

The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼%, with the Bank Rate at ½% and the deposit rate at ¼%. With overall economic slack now absorbed, the Bank has removed its exceptional forward guidance on its policy interest rate. The Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant.

Inflation not expected to be an issue in the years to come:

CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.

Quantitative easing has ended and some of the new money "printed" will return to the Bank of Canada:

The Bank will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.

January 26, 2022
8:14 am
Loonie
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This part of their statement appears to be key, although I don't know what it means in real terms:

"The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.

While COVID-19 continues to affect economic activity unevenly across sectors, the Governing Council judges that overall slack in the economy is absorbed, thus satisfying the condition outlined in the Bank’s forward guidance on its policy interest rate. The Governing Council therefore decided to end its extraordinary commitment to hold its policy rate at the effective lower bound. Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target."
https://www.bankofcanada.ca/2022/01/fad-press-release-2022-01-26/

I'm no economist but it seems to me they are fixated on impact of covid and are ignoring other factors which will continue to fuel inflation. They seem to be a group of short term thinkers, which is hard to believe, but it's the only conclusion I can come to.

January 26, 2022
8:54 am
canadian.100
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To be fair, Covid and its effects are a big factor right now and who knows when we will be through it - so when you have such big unknowns, there is no hard and fast solution to solving all our economic problems. Economists are not magicians any more than our present cast of politicians. I think that maintaining the rate was likely more a political decision than an economic decision. Politicians fear that raising the rate could make the economy stall and that is not what the party in power wants - that would be a negative for them.

January 26, 2022
9:02 am
AltaRed
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I suspect BoC came to the conclusion that higher rates right now would not solve supply chain inflation but would be a headwind for debt servicing by gov'ts, corporations and individuals alike (personal loans and mortgages). That all said though, doing nothing does not put some brakes on asset inflation (stocks and housing prices) and that is disappointing.

Supply chain inflation is a sticky issue. It extends from manufacturing centres where there is havoc in production line output, and in shipping and logistics getting goods to the retail shelves. That is not solvable by rate increases except indirectly through reducing consumer demand. One might argue that households having to pay more to service debt would do that, and it should, but it also puts a dampener on corporations making the investments to de-bottleneck supply chain issues.

January 26, 2022
11:01 am
savemoresaveoften
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AltaRed said
I suspect BoC came to the conclusion that higher rates right now would not solve supply chain inflation but would be a headwind for debt servicing by gov'ts, corporations and individuals alike (personal loans and mortgages). That all said though, doing nothing does not put some brakes on asset inflation (stocks and housing prices) and that is disappointing.

Supply chain inflation is a sticky issue. It extends from manufacturing centres where there is havoc in production line output, and in shipping and logistics getting goods to the retail shelves. That is not solvable by rate increases except indirectly through reducing consumer demand. One might argue that households having to pay more to service debt would do that, and it should, but it also puts a dampener on corporations making the investments to de-bottleneck supply chain issues.  

BoC wants to give enuf heads up for the borrowers esp those on variable rate, to have time to lock in to a fixed term, as most are/can only afford a fixed payment and can not withstand even $100-200 increase per month in mortgage pmt etc due to rising rates. Now that they make crystal clear first rate hike is in March, a variable rate borrower should run to the bank to get it done, here goes the busy branches again lol

But they still think inflation will drop to 3% by end of the year, 2% long term avg by end of 2023 if I read the statement correctly. In my mind, they are still wrong (just like they were saying inflation was transitory.) A new long term inflation of btw 2.5-3% is more realistic going fwd (since I dont see them raising o/n rate beyond 3-4% anytime soon.)

January 26, 2022
11:17 am
Loonie
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Borrowers have already had months of notice that rates would go up.
Renewing mortgages is not a big issue as they can normally just extend the term if necessary.
It's buying a home that remains difficult, especially for first timers. Those folks need to see the market cool somewhat, foreign buyers curbed, and developers tamed which will lead to more supply. right now, they are probably going to end up paying about the same, regardless of whether it's for higher interest or higher prices.
So I don't think any of this should prevent increasing the rate.

As for government, I'm not sure how much they interfere. All governments always want cheaper rates, of course, because all governments are always in debt. But they can achieve a similar result by increasing revenues, which means a healthy economy that produces more income in taxes.

My impression is that BoC doesn't think the economy is quite healthy enough yet. They have this squarely pegged on covid, rightly or wrongly. According to this logic, we'd all be really happy now with our much increased rates if only it hadn't been for covid. I doubt it. And there will always be a new crisis to blame it on.

January 26, 2022
11:53 am
Bill
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I agree, AltaRed, it's supply chain issues they're (properly) focused on right now. The supply chain issues might end up being more endemic than we think as many people are ignoring that there are not enough people who can or want to work right now. That slows everything down. Big labour shortages in many critical areas (many of these positions are of no interest to younger people, plus the existing workers are relatively old) so not necessarily short-term. I can't remember the last time I heard a parent say they hoped their child would become a truck driver or work in shipping/receiving.

Bank of Canada calibrates rate every few months, or even less if necessary, so short-term focus is important.

I see no issue with housing prices, the last house that sold in my very-average neighbourhood (last week) was on the market for a few days, apparently got well above asking, lots of bidders.

January 26, 2022
1:35 pm
savemoresaveoften
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Inflated house prices give people a false sense of "feeling rich", unless of course prices stay high forever. But guess what, if RE prices keep going up, it just feeds inflation too...
I am in the camp a house is a place to live, not an investment and definitely a house owner should not do a high 5s everytime the news say house price up 30% in the past year....

January 26, 2022
1:44 pm
Bill
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The high 5's are by their heirs, i.e. young buyers today are ok to pay the high prices for homes because one day they'll inherit the (by then) far higher inflated values in their parents' homes.

January 26, 2022
7:52 pm
Doug
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I think the BoC may have wanted to go with a modest rate increase this month (0.10 to possibly 0.25); however, they likely held back, although they'll never confirm this publicly, on the back of the U.S. Federal Reserve decision. Otherwise, the loonie would've surged, and that would've hurt an already beleagured import/export sector. While central banks say they are not governed by other central bank decisions, the reality is that they very much are, and in this way, the U.S. Fed looms large over other central bank decisions. In many respects, it is the de facto Bank of International Settlements. sf-cool

On another note, kudos to CIBC economists who bucked the consensus call and said the BoC would not raise rates at its January meeting.

Cheers,
Doug

January 26, 2022
9:02 pm
Loonie
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The US Fed has now said clearly that it intends ot raise its rate in March. I read also that mortgage rates have been climbing in the US (here too?)
Does it really matter what these Banks actually do? It seems all they have to do is get out the bellows and blow hard on the flames emanating from the rumour mills.
What a circus!

Don't be surprised if rates don't move much after the Big Announcement actually takes place - if it does. They've risen almost a full point over the last year with no action on rates from central bank.
There should be a flood of people hurrying to convert variable mortgages to terms in advance of BoC increases. This in turn will increase demand for GIC deposits (and appears it already has). BoC doesn't need to actually lift a finger for this to happen. It just has to tell a story of good intentions that people are prepared to believe.

January 27, 2022
6:57 am
canadian.100
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I note that the 5year GofC bond rate dropped a bit this morning while the US 5year Government bonds went up a bit. Toronto stock market is up today (along with US markets) so investors in the TSX seem content with the "no change" in the BofC rate. I think the raising of rates by the BofC will be v-e-r-y gradual. I do not think there will be any big increases in GIC rates after the increases we have already seen this month.

January 27, 2022
7:31 am
Norman1
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What's the hurry for the Bank of Canada rate increases?

In their press release that I quoted from, Bank of Canada believes inflation will "decline reasonably quickly to about 3% by the end of this year" anyways as supply chain issues continue to resolve.

Interest rate increases won't increase the supply of computer chips, cars, or bicycles. The increases won't transport more of the shipping containers stacking up here in North America back to Asia.

January 27, 2022
7:45 am
Bill
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I know someone with a manufacturing plant in China, recently unable to get much stuff out of there due to China lockdowns (heightened due to Olympics they're trying to stage) plus no containers.

January 27, 2022
9:05 am
canadian.100
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Norman1 said
What's the hurry for the Bank of Canada rate increases?

In their press release that I quoted from, Bank of Canada believes inflation will "decline reasonably quickly to about 3% by the end of this year" anyways as supply chain issues continue to resolve.  

Sure that is what the BofC says - inflation will decline quickly to about 3% this year.
Do you really believe that? I don't.

January 27, 2022
10:22 am
Loonie
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I have zero confidence in anything the BoC says about what is going to happen in the future, be it next rate date or a year from now. The only thing you can count on with them is what they are actually doing. They are always very willing to change their predictions about the future, either about external factors or their own decisions. This may be realistic, but you can't count on them any more than any other prognosticator. They all depend on the same data.

January 27, 2022
12:21 pm
Bill
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If you think the inflation increase is mainly due to supply chain issues, and if you think they're going to resolve this year, then it's prudent to not do much yet. But if you think inflation is mainly due to excess money due to pandemic moneyprinting then it'd be better to try to cut if off sooner than later, I suppose.

I guess Norman1 has convinced me the moneyprinting is not an issue, plus while I disagree that the supply chain issues are likely temporary I think most folks think they are, so the Bank's stance makes sense to me.

January 27, 2022
12:25 pm
Kidd
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Loonie, you must love it when the Canadian government makes the claim... we'll balance the budget in 10 years. There are so many variables to that promise, it's not worth saying.

Scarborough will get a subway in 25 years. They've been saying that for 30 years now.

No one has ever accused a Canadian policy maker of being either honest, or intelligent, except for another Canadian policy maker.

January 27, 2022
12:46 pm
Kidd
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Bill, those who run this country believe... it will all work out in the wash.

In other words. If we dig our financial debt deep enough, we will come out on the other side of the world, then we'll be back at zero. It's a drama teacher's view of math.

January 27, 2022
12:59 pm
Norman1
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canadian.100 said

Sure that is what the BofC says - inflation will decline quickly to about 3% this year.
Do you really believe that? I don't.

Lower inflation has already started.

CPI basket price have been climbing at a rate of 2½% to 3% per annum since August last year. If that continues, we will have around 3% year-over-year CPI inflation by this September.

The question is will the current trend in the CPI continue?

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