The Bank of Canada defied market expectations by not raising its key overnight rate, despite inflation at the highest level since 1991.
"With overall economic slack now absorbed, the Bank has removed its exceptional forward guidance on its policy interest rate," said the Bank of Canada in a release."
"The Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant."
Canada’s central bank signalled an interest rate hike is coming.
“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 per cent inflation target,” it said.
Despite inflation running hot, the Bank of Canada expects inflation to cool to 3 per cent by the end of this year as more supply chain disruptions are resolved and demand for goods shifts back towards services. For now, the current wave of COVID-19 is still top of mind.
“Markets had essentially given the Bank a green light to start hiking but it opted not to, instead leaving the policy rate at 0.25 per cent,” said Stephen Brown, senior Canada economist at Capital Economics.
“We assume that was due to concerns about the negative optics surrounding a rate hike while much of the country is still facing coronavirus restrictions.”
The Bank of Canada says it expects the economic impact of the current Omicron wave to be less severe than previous ones.
It expects Canada’s economy to grow by 4 per cent in 2022 and about 3.5 per cent in 2023.
Bank of Canada Governor Tiff Macklem acknowledged during a press conference that prices have risen to uncomfortably high levels.
“Canadians can be assured that we will use our monetary policy tools to control inflation," he said.
Housing to stay elevated
The Bank of Canada also acknowledged home prices are a persistent problem.
“You can attribute it to a number of things. Certainly, low interest rates is one of those factors. A recent spike up in prices has also brought investors into the market,” said Bank of Canada Senior Deputy Governor Carolyn Rogers who also answered reporters' questions during the news conference.
“Overall the bank's view is that the most important thing that’ll restore balance to the housing market in Canada is an increase in supply.”
A hike to the overnight rate will push up variable-rate mortgages, which have become increasingly popular during the current rock bottom interest rate environment. Rogers says Canadian real estate will stay hot for now but expects future rate hikes to cool things down.
“We think housing activity will stay elevated for a while. Certainly, our message today is that interest rates that are on a rising path will feed through to mortgage rates and likely moderate demand over time,” she said.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.