Going into the Bank of Canada meeting markets had priced in around a 70-80% chance of the BoC hiking interest rates. In the event, the BoC held rates steady but they did remove exceptional forward guidance. Digesting the meeting can best be described as a ‘bullish hold’. The BoC refrained from hiking rates on Omicron fears, but the details of the meeting show that the BoC are more bullish now.

Output gap closed

One of the BoC’s concerns prior to this meeting was the desire to see the output gap close. The output gap is simply the difference between the actual GDP and the potential GDP. So, the output gap prior to the meeting was -2.25% 0 -1.25%. At the last meeting, the output gap is now -0.75% – +0.25%. The gap is closed and that is a bullish force for the CAD.

Inflation revised higher

The readings compared to the previous meetings are as follows:

  • 2021: 3.4% (prev. 3.4%)
  • 2022: 4.2% (prev. 3.4%)
  • 2023: 2.3% (prev 2.3%)

The takeaway here is that the BoC do see inflation rising more this year than they did and expect it to be close to 5% in 2022. However, they see inflation falling again in 2023 as most of these pressures as seen as supply chain driven. The BoC will be happy to use monetary tools to ensure inflation does not become embedded.
The BoC will keep an eye on wages. Remember it was higher wages that moved the BoE to hike rates in December. The issue here is that if inflation gets to wages then it gets everywhere. The only tool a bank really has to control inflation is to hike rates, so expect any high wage growth data to boost the CAD in the near term.


The BoC stated that: ‘The Omicron variant is weighing on activity in the first quarter. While its economic impact will depend on how quickly this wave passes, it is expected to be less severe than previous waves’. Thus

The Press conference

Afterwards, Governor Macklem stated that the BoC mainly held off on rates due to Omicron risks. Macklem also said that the BoC would not say how fast or how far rates will be going up. Might take a few steps higher and then pass to assess progress. Macklem also stated there was some uncertainty about how quickly inflation will come down. In summary, this meeting should be supportive for CAD, especially if oil prices remain elevated. You can read the full report here.