Bank of Canada Holds Rates, Says High Inflation Will be Temporary

The Bank of Canada's Wednesday rate announcement was "steady as she goes," as it maintained its Quantitative Easing program and reiterated that rates should stay where they are until the second half of next year. Inflation is expected to remain elevated over the short term, but it is expected to ease later in the year. Analysis suggests that the BoC's less flexible policy mandate and upside risks to output gap closure could lead to a rate hike earlier in its forward guidance window. The willingness of policymakers to shrug off a big miss on their first-half growth forecast suggests a hawkish bias. Benjamin Reitzes, BMO Economics, Derek Holt, Scotiabank, and Stephen Brown are skeptical that the Bank of Canada will raise interest rates in 2022, given the likelihood that inflation will drop back below 2% next year. If incoming data aligns with the BoC's forecasts, the BoC could reduce weekly bond buying again in July to $2 billion per week.