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Despite Omicron, Bank of Canada likely to signal earlier rate hikes possible -Breaking


© Reuters. FILE PHOTO – A sign was spotted outside Bank of Canada Building in Ottawa (Ontario, Canada), May 23, 2017. REUTERS/Chris Wattie/File photo

Fergal Smith and Steve Scheerer

(Reuters) – Inflation is on the rise and the Bank of Canada may adjust its interest rate guidance to increase borrowing costs in 2019. This will allow it to take advantage of the Omicron variant’s threat to growth to lower the cost of borrowing.

When it kept the overnight rate at 0.25%, which is the lowest it’s been since March 2020, the bank reiterated that guidance. The bank stated it will not increase rates until the economic slack in 2022 has been fully absorbed.

It has become more hawkish in recent months, warning of an inflationary cycle that will last longer than anticipated. Governor Tiff Macklem stated that the economy’s slack caused by the coronavirus epidemic has significantly diminished.

Andrew Kelvin of TD Securities Canada, says that even though the Bank of Canada may be cautious ahead of a winter set of shut-downs …,, if they feel inflation expectations have become unstable, this will be their main concern.

He said, “Certainly they will wish to allow themselves the choice of March in January.”

On Jan. 26, the bank will meet again to set rates and update forecasts. According to the money market, there will be four rate rises in 2019, with the first occurring in March. There is a chance that they will move in January with a 60% probability.

Adam Button (chief currency analyst, ForexLive) stated that January will become a statement that each meeting is now “a live meeting” in order to increase the rate of interest.

Omicron’s spread can slow growth. However, it may also increase the economic dynamism by slowing down the rate at which Omicron is produced, according to analysts.

Button stated that “I don’t believe (the bank), will change its course on Omicron as they’ll consider it inflationary,” because it could further disrupt supply chains.

November inflation was close to 5%, and the economy is beginning to feel the pinch. Macklem stated Wednesday that the bank was moving closer to not providing any forward guidance which guaranteed low interest rates for the pandemic. This signal, some analysts believed, meant that the rate would drop in January.

An expected shift in the Bank of Canada’s guidance in January means that the Bank of Canada will raise rates sooner than the U.S. Federal Reserve. The Fed on Wednesday announced it would accelerate a phase out of its bond buying stimulus in order to allow for three possible interest rate hikes in 2022. The money markets are expecting a Fed rate hike in June.

On Thursday, the Bank of England became the first central bank in the world to increase borrowing costs after the worldwide coronavirus epidemic.

The January meeting will be dominated by a variety of Canadian data including the December employment and inflation numbers. Doug Porter of BMO Capital markets, chief economist said that while most economists don’t believe in an early January increase, this is possible.

“Never say never. Porter stated that he couldn’t rule out the possibility. Porter said that “we’ll have lots data by then”, adding that all the numbers would need to point in the same direction and give the bank the urgency to act quickly.