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Bank of Canada: Unchanged Forward Guidance Following Omicron Scare

Bank of Canada: Unchanged Forward Guidance Following Omicron Scare

09-12-2021 11:18

ZFX – Keeping its key interest rate on hold, The Bank of Canada had created a “new uncertainty” despite widespread inflation and was warned of the Omicron coronavirus variant.

Canada’s central bank kept the key interest rate at 0.25% and maintained that the economic sluggishness will be absorbed in 2022’s “mid-quarter”, setting the stage for the first rate hike after April.

Noting that employment has returned to where it was before the pandemic hit, the central bank dropped price-pushing pressure references, that it deemed “temporary”, referring to high job openings and wage growth.

“Inflation is rising and the impact of global supply constraints is causing a broader increase in the prices of goods,” the Bank of Canada said.

“The effect of this constraint on prices is likely to take some time to resolve, given the existing backlog of supply.”

We can see “considerable momentum” in Canada’s economy moving into the fourth quarter but events like the Omicron emergence and the “devastating flooding” in British Columbia could possible be a hit to economic activity.

“This could weigh on growth by adding to supply chain disruptions and reducing demand for some services,” he said.

“Some traders expecting a Canadian rate hike were disappointed. As a result, the Canadian dollar slumped on the decision,” said Adam Button, chief currency analyst at Forexlive.

Economists said Canada’s central bank will likely buy time until its January meeting, when it will update its economic forecasts, to get a clearer view of how the Omicron and flooding will impact economic activity.

“For now, I think it’s a ‘waiting game’ until January as we assess more information on Omicron,” said Derek Holt, vice president of capital markets economics at Scotiabank.

Canada’s headline inflation has been above the central bank’s 1% to 3% control range for seven months, as global supply chain bottlenecks and high energy prices fuel price gains.

The Bank of Canada reiterated that it expects inflation to remain high in the first half of 2022, returning to its 2% target in the second half of the year.

Money market rates fell between 8 and 10 basis points after the policy decision, with markets expecting the first hike in March or April, and a total of five hikes next year.

At the writing of this article, USD/CAD is seen in a major correction after breaking the trendline as shown in the chart above.

Now USDCAD is still stuck at the support area around 1.2600. Technically, the weakening of the CAD due to the stagnation of interest rates makes this pair has a chance to retest towards the key level at 1.2730.

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