OTTAWA—The Bank of Canada kept its benchmark overnight interest rate on hold and its forward guidance unchanged, even as it warned that the Omicron variant of Covid-19 had introduced more uncertainty into the country’s economic recovery.
The central bank said Wednesday in a brief statement that recent data suggest the economy had strong momentum going into the fourth quarter, including broad-based job gains that returned the employment rate to around its pre-pandemic level. However, it raised concerns about the potential impacts of the Omicron variant on future growth and warned that recent flooding in Western Canada, which damaged transportation infrastructure, could represent another setback.
“The devastating floods in British Columbia and uncertainties arising from the Omicron variant could weigh on growth by compounding supply-chain disruptions and reducing demand for some services,” the central bank said.
The Bank of Canada has kept its benchmark overnight interest rate at the ultralow level of 0.25% since March 2020, around the time pandemic-related shutdowns first began in North America. Its most recent forecast, published in late October, indicated the key rate would likely remain at that level until the second or third quarter of 2022. That timeline is based on when policy makers expect economic slack to be absorbed so that the bank’s 2% inflation target can be sustainably achieved.
On Wednesday, the bank said its forward guidance on the rate path hadn’t changed.
The statement’s language on Wednesday “hints that an April move is in the cards,” CIBC Capital Markets economist Avery Shenfeld said. He said the statement presented an optimistic take on momentum going into the fourth quarter and noted that worries over floods and the Omicron variant might no longer be relevant by the spring.
Strong economic data—coupled with persistently high inflation—had in recent weeks led some analysts to move up their expectations for when the central bank might begin raising interest rates, with many saying they anticipated a first move in April. Canada’s November jobs report, issued last week, showed the economy added a net 153,700 jobs in the month, significantly more than anticipated, and the unemployment rate fell to 6% from the previous month’s 6.7% reading.
The central bank on Wednesday said Canada’s third-quarter economic growth, which came in at 5.4% annualized, was led by a rebound in consumption that occurred as economic restrictions eased and vaccination rates rose. Still, it added that ongoing supply bottlenecks continued to hold back growth in non-commodity exports and business investment.
Supply constraints also continued to feed into high inflation, the bank said, and are now affecting a broader range of prices. “The effects of these constraints on prices will likely take some time to work their way through, given existing supply backlogs,” the central bank said.
The Bank of Canada’s next interest-rate announcement is due Jan. 26.
Write to Kim Mackrael at [email protected]
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