Rates are going up: “Emergency monetary measures to support the economy are no longer needed”

Our message is threefold.

1. The emergency monetary measures needed to support the economy through the pandemic are no longer required and they have ended.
2. Interest rates will need to increase to control inflation. Canadians should expect a rising path for interest rates.
3. While reopening our economy after repeated waves of the COVID-19 pandemic is complicated, Canadians can be confident that the Bank of Canada will control inflation. We are committed to bringing inflation back to target.

Let me take each of these in turn.

The Bank’s response to the pandemic has been forceful. Throughout, our actions have been guided by our mandate. We have been resolute and deliberate, communicating clearly with Canadians on our extraordinary measures to support the economy—and on the conditions for their exit. We said we would end emergency liquidity measures to support core funding markets when market functioning was restored, and we did. We said our quantitative easing (QE) program would continue until the recovery was well underway. We began tapering QE last spring and ended it in October.

Last week’s policy announcement marked the final step in exiting from emergency policies. We said exceptional forward guidance would continue until economic slack was absorbed. With the strength of the recovery through the second half of 2021, the Governing Council judged this condition has been met. As such, we have removed our commitment to hold our policy rate at its floor of 0.25%.

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Second, we want to clearly signal that we expect interest rates will need to increase. A lot of factors are contributing to the uncomfortably high inflation we are experiencing today, and many of them are global and reflect the unique circumstances of the pandemic. As the pandemic fades, conditions will normalize, and inflation will come down. However, with Canadian labour markets tightening and evidence of capacity pressures increasing, the Governing Council expects higher interest rates will be needed to bring inflation back to the 2% target.

Finally, Canadians can be assured that the Bank of Canada will control inflation. Prices for many goods and services are rising quickly, and this is making it harder for Canadians to make ends meet—particularly those with low incomes. Prices for food, gasoline and housing have all risen faster than usual. We expect inflation will remain high through the first half of 2022 and then move lower. There is some uncertainty about how quickly inflation will come down because we’ve never experienced a pandemic like this before. But Canadians can be assured that we will use our monetary policy tools to control inflation.

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