First National Financial LP

Residential Market Commentary - Interest rate anticipation runs high

  • First National Financial LP

Market watchers have their gaze firmly fixed on January 26th.  The Bank of Canada will make its first rate announcement of 2022 and deliver its first Monetary Policy Report for the year.

The key factors that are top-of-mind ahead of the announcement are inflation and what the central bank will do about it.

There has been a rising chorus of calls for the Bank to start increasing interest rates in an effort to quell generationally high inflation, which is now running at 4.8%.  Many analysts and economists expect the BoC will do that on the 26th, even if it is just to provide reassurance that the Bank is prepared to act.  They point out that the broader economy no longer needs stimulus and support, and the labour market is strong.

From the Bank’s point of view, a prime consideration is warding off “inflation expectations”, which could trigger a self-fueling inflation spiral of higher consumer demand, higher prices, higher wage demands, and so on.

But there are solid reasons for the central bank to stick with its stated plan to wait until at least March to start raising rates.  Chief among them is the Omicron variant, which is currently befuddling all efforts to keep the overall economy on track. 

Further, the exact start date of interest rate hikes is not as important as where the increases take the economy over the next year or two, and that is what the Bank of Canada is really trying to manage.