Central Banks Combat Inflation

ECONOMIC HIGHLIGHTS

In the global fight against surging inflation, the Bank of England has become the first major central bank to raise interest rates. Borrowing costs were increased 15 bps to 0.25% in a surprise move that reinforces the shift among central bankers that dealing with inflation has taken precedence over the economic threat of rising coronavirus cases. Other major central banks are not far behind, with the Bank of Canada and Federal Reserve signaling their intentions to also raise interest rates in 2022 to combat inflation.

While the Bank of Canada’s new policy mandate grants additional flexibility to hold off on raising interest rates in order to achieve maximum employment, the stipulation is that such patience would only be permissible when “conditions warrant”. In a recent statement by the Bank of Canada, it was made clear that the current situation does not warrant such delay and that inflation is already considerably above target. With inflation in Canada currently holding at its 18-year high of 4.7%, economists are projecting four interest rate hikes set to start in the “middle quarters” of 2022.

This timing closely aligns with that of the Federal Reserve, which just announced it will be doubling the pace of its tapering to end its quantitative easing program in March instead of June. The central bank had also stopped referring to surging inflation as “transitory” given it currently stands at 6.8%, the highest level seen since 1982. The accelerated tapering timetable sets up the Federal Reserve to begin raising interest rates soon afterwards, with current expectations for three hikes by the end of next year.

Looking to the year ahead, a monetary policy misstep by central banks is fast becoming the main worry alongside runaway inflation, according to a recent survey of asset managers by Bloomberg. The pandemic, geopolitical risks and a slowdown in China round out the other top risks for 2022, albeit at materially lower levels. Despite these uncertainties and the anticipated interest rate increases driving yields higher, the cost of debt will continue to remain historically low and provide a healthy environment for the Canadian commercial real estate market in 2022.

VIEWPOINTS
 

• BOE Surprises With First Hike in Crisis to Curb Inflation

• New Bank of Canada mandate could lead to more ‘patient’ raising of interest rates under certain circumstances, Macklem says

• Fed Doubles Taper, Signals Three 2022 Hikes in Inflation Pivot

 

Download Full Report