The latest annual inflation readings were still far below the central bank's targeted 2%
Not even the recent inflation spike will be enough to force the Bank of Canada to alter its policy rate or its quantitative easing programs, according to independent mortgage planner David Larock.
In a recent column for Move Smartly, Larock wrote that while the surprising October results nearly doubled the 0.4% growth projected by Bloomberg-polled economists, the 0.7% annual increase was still far below the central bank’s target of 2%.
“If the bank reacted to that uptick in any way, it would be in anticipation of rising inflationary pressures ahead,” Larock said. “But in all of its recent guidance, the BoC has made it clear that this time around it will adjust in reaction to, and not in anticipation of, higher inflation.”
The central bank will not raise its policy rate before the U.S. Federal Reserve does so, as “that would cause the loonie to rise against the greenback and heap further suffering on our export sector,” Larock wrote.
“The bank is already concerned about the loonie’s value, which has soared since the pandemic began… If the Fed is going to delay rate hikes and let the U.S. economy run hot for an extended period after U.S. inflation reaches or exceeds 2%, then the BoC will have to do the same,” Larock predicted.
Rumblings about the BoC dialling down its QE programs also appear to be groundless speculation at best.
“For starters, the bank’s decision to reduce its weekly purchases of government bonds from $5 billion to $4 billion had nothing to do with rising inflation,” Larock said. “Its QE purchases have been so aggressive that the bank is dominating the entire market… If the bank hadn’t slowed its pace of purchases, it wouldn’t have been long before there weren’t enough government bonds left to trade in the open market.”
The steadily larger gap between the economy’s actual output and its maximum potential output makes policy changes unlikely at present.
“The BoC watches our output gap closely because it provides a reliable gauge of whether rising inflationary pressures are likely to be sustained,” Larock explained. “Our output gap had stopped narrowing even before COVID hit, and it won’t come as a surprise to anyone that it has widened considerably since then.”
With projections of the output gap not likely closing until at least 2023, “the BoC is now focusing its QE purchases on the bonds that are tied to borrowing rates that most directly impact households and businesses to specifically help address that gap,” Larock said. “A short-term surge in inflation won’t alter that approach.”
