• Markets were pricing in a 70% chance of a hike
  • Most economists expected the BOC to leave rates unchanged
  • Prior was 0.25%
  • BOC says overall economic slack now absorbed
  • "Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target."
  • BOC removed its exceptional forward guidance on its policy interest rate
  • Says US economy is growing robustly while growth in some other regions appears more moderate, especially in China due to current weakness in its property sector
  • BOC sees growth of 4% in 2022 and 3.5% in 2023
  • H2 2021 now looks to have been even stronger than expected
  • Omicron variant is weighing on activity in the first quarter
  • Economic growth is then expected to bounce back and remain robust over the projection horizon
  • The labour market has tightened significantly
  • Persistent supply constraints to keep inflation close to 5% in H1 2022
  • Inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period
  • After hiking, the BOC "will consider reducing the size of its balance sheet" via rolloff
  • Full text of the BOC statement
  • Full text of the MPR (pdf)

This is a surprise and USD/CAD has quickly jumped to 1.2620, however the commentary is clear that a hike is coming in March and that slack has been absorbed. That sets the BOC on a path for consistent rate hikes. Waiting until March is likely an effort to keep Canadian rates from diverging from the US, though I expect that's only a matter of time.

More details on forecasts:

  • Output gap in Q4 was -0.75% to +0.25% compared to Q3 estimate of -2.25%
  • 2021 inflation averaged 3.4%, in line with Oct estimate
  • 2022 inflation seen at 4.2% vs 3.4% in Oct
  • 2023 inflation still seen at 2.3%
  • Q4 GDP seen at 5.8% vs 4.0% in Oct
  • Q1 seen at +2.0% annualized
  • 2021 GDP was 4.6% vs 5.1 in Oct
  • 2022 seen at 4.0% vs 4.3% in Oct
  • 2023 seen at 3.5% vs 3.7% in Oct