Investors watching for clues about monetary path

By Mark Burgess | October 22, 2021 | Last updated on November 29, 2023
3 min read
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Amid stubbornly high inflation and stalling economic growth, investors will be watching next week’s Bank of Canada interest rate announcement for hints about an end to quantitative easing and the timing of rate hikes next year.

The central bank is expected to maintain its overnight rate at 0.25% on Oct. 27 while reducing its weekly bond purchases of $2 billion.

Bank of Montreal chief economist Douglas Porter wrote in a research note Friday that the BoC’s “ultra-stimulative policies look far out of step with red-hot housing, record equity markets, decades-high inflation, and employment back at pre-pandemic levels.”

Statistics Canada reported this week that the annual inflation rate hit 4.4% in September, the highest in nearly two decades.

While Bank of Canada Governor Tiff Macklem has said the bank won’t be in a position to raise rates until late in 2022, the market has almost fully priced in four rate hikes next year, Porter wrote. At next week’s meeting, he said he expects the bank to “modestly push back” on those assumptions.

At the same time, economic growth has run up against supply-chain bottlenecks, leading economists to adjust forecasts downward.

A report from RBC on Friday noted the central bank has said it won’t raise interest rates until economic slack has been absorbed.

“Weaker GDP data in the near-term suggests that could happen later than previously thought,” the report said. “However, given a tightening labour market and higher inflation, the BoC will likely hold its position that rates will rise in the second half of next year. If anything, the risk is tilted toward rate increases kicking off even earlier.”

The C.D. Howe Institute’s monetary policy council recommended the Bank of Canada hold its rate before raising it to 0.50% by April and to 1% by October. By this time next year, all 11 members of the council called for an increase, though the rates ranged from 0.50% to 1.50%.

CIBC chief economist Avery Shenfeld said in a report on Friday that the whole principle of forward guidance could lose credibility if the BoC moves early. Pledging to maintain low rates as long as certain conditions exist can help keep longer-term rates low without further reducing the overnight rate.

“That’s why Governor Macklem should think long and hard about any move to break his word about not raising the policy rate before the output gap is closed,” Shenfeld wrote.

He blamed inflation on Covid-19 shutdowns at mines, factories and ports — a “supply shock” addressed through global vaccinations rather than “an excess of demand” to be addressed with high rates.

Even if inflation persists next year, Shenfeld said there were other policy tools besides the overnight rate to address rising prices. One would be forward guidance hinting at a lot of rate hikes once the output gap is closed; another would be to end bond purchases.

“Neither of these moves are likely to be seen just yet, since the Bank of Canada likely shares our view that, even if ‘transitory’ doesn’t mean very short lived, the upward spike in inflation can be fixed without early moves to slow Canadian activity,” Shenfeld wrote.

“But should that fail, it has options it can use to cool activity without breaking its word on the overnight rate.”

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Mark Burgess

Mark has been the managing editor of since 2017. He has been covering business and politics for more than a decade. Email him at