Breaking: Bank of Canada leaves policy settings unchanged in December as expected

The Bank of Canada on Wednesday announced that it had decided to leave its benchmark interest rate unchanged at 0.25%, as most economists, analysts, and traders had been expecting. CAD Short-Term Interest Rate (STIR) markets had priced in a modest 16% chance that the bank would hike interest rates by 25bps to 0.50%. 

Market Reaction

The loonie has seen an initially negative reaction to the decision, perhaps as the small minority of hawkish bets on a 25bps rate hike were priced out. USD/CAD is now trading in the 1.2630s, up from around 1.2610 prior to the decision. 

Key takeaways from policy statement as summarized by Reuters

"The BoC repeated that it sees slack being absorbed sometime in the middle quarters of 2022."

"The Omicron variant of Covid-19 and British Columbia floods could weigh on growth by compounding supply chain disruptions, cutting demand for some services."

"The bank continues to expect CPI inflation to remain elevated in H1 2022 and ease back towards 2% in H2."

"Persistent supply bottlenecks continued to inhibit growth in some areas of GDP in Q3, including non-commodity exports and business investment."

"Recent economic indicators suggest the economy had considerable momentum going into Q4; employment "essentially back to pre-pandemic level," wage growth has picked up."

"CPI inflation is elevated and the impact of global supply constraints is feeding through to a broader range of goods prices."

"Housing activity had been moderating but appears to be regaining strength, notably in resales."

"The effects of these constraints on prices will likely take some time to work their way through, given existing supply backlogs".

"In view of ongoing excess capacity, the economy continues to require considerable monetary policy support."

"Accommodative financial conditions are still supporting economic activity globally."