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Despite record high inflation, Bank of Canada holds interest rate steady — for now

Bank expected to raise its rate multiple times this year soon to tame inflation

The Bank of Canada, led by Tiff Macklem, is expected to raise its benchmark lending rate a half dozen times this year.

The Bank of Canada, led by Tiff Macklem, is expected to raise its benchmark lending rate a half dozen times this year.

Photo: Bloomberg / David Kawai


The Bank of Canada has decided not to raise its benchmark interest rate just yet.

Like many other central banks around the world, the bank slashed its core lending rate — known as the target for the overnight rate — at the onset of the pandemic in March 2020, to ensure that consumers and businesses had access to cheap lending in order to keep the economy afloat.

But two years of rock-bottom lending rates have been a major contributor to inflation, which rose to almost five per cent in Canada last month — its highest level in more than 30 years (new window).

That prompted expectations that the bank would need to start raising its rate soon. But the bank decided not to do that yet, electing to keep its rate at 0.25 per cent, the same level it's been for the last 670 days.

But it did make it clear that it could be leaning that way in the very near future.

While the rate stayed the same, the bank did decide to do away with what it calls its exceptional forward guidance to keep rates where they are for as long as is needed, until the slack in the economy gets absorbed.

This is a significant shift in monetary policy, governor Tiff Macklem said at a press conference following the announcement. [It] signals that interest rates will now be on a rising path.

But the bank said the ongoing uncertainty around the Omicron variant means it's not ready to take its first steps along that path yet.

Why not now?

At least one bank watcher says standing pat was a mistake.

The decision, in our view, is a policy misstep, foreign exchange analyst Simon Harvey with Monex Canada said, and is one that could prove costly later down the line.

By waiting to raise its rate, Harvey said, the bank risks emboldening near-term inflation expectations and flaming the fire underneath the housing market.

Canada's housing market has been on fire during the pandemic, with cheap lending acting like rocket fuel and sending prices higher. 

The central bank's rate impacts the rates that Canadians get from their banks on things such as variable-rate mortgages, so keeping the rate low will extend that.

Investors expect as many as half a dozen rate hikes this year, which means the door was open for the bank to raise the rate.

The question is why didn't they take it? Harvey said. Governor Macklem will have a lot of explaining to do.

Pete Evans (new window) · CBC News