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Can the BoC Manage Inflation Expectations?

June 2021 | Rate Outlook

May 31, 2021
6 mins
An older man uses his pen to point to a specific section of a document

The Bank of Canada (BoC) has a problem. Economic recoveries bring rising demand. But supply shortages are everywhere: chips, lumber, cars, furniture, houses, you name it. Everyone knows what happens to prices when equilibrium gets out of whack.

All this means one thing. The biggest challenge now facing the Bank of Canada is keeping a lid on inflation expectations.

The BoC is working overtime on this battle, taking every opportunity it can to calm markets—assuring us that inflation is likely to overshoot the Bank’s 2% target, but only temporarily.

If the overshoot is not temporary, ramifications for mortgagors will be swift. Rates do not take their time on the way up when inflation expectations surge.

This is all the talk in economists' circles these days. Here’s what some are saying now…

Bank of Canada Governor Tiff Macklem

“The biggest domestic [financial] vulnerabilities are those linked to imbalances in the housing market and high household indebtedness…These are not new, but they have intensified." (Source)

The Dot’s Take: That fact is not keeping a lid on inflation, but it should ensure that we don’t see the degree of rate hikes we saw pre-2000s.

National Bank of Canada

On inflation: “…the average of the three measures of core inflation put forward by the Bank of Canada since 2017 rose two ticks to 2.1%, the highest since 2012 and above the central bank’s mid-point target. Interestingly, the Bank of Canada recently argued that these three measures of core inflation…did not provide a faithful picture of trend inflation in the current context and emphasized the need to look at four other measures of inflation to better gauge the situation.”

“So how have these new ‘alternative’ measures behaved since [April]?...[they have] surged from 1.0% in February to 2.2% in April, even surpassing the average [of the three traditional measures of core inflation]. It’s perhaps time for the central bank to recognize that the output gap is smaller than what is currently assumed.” (Source)

The Dot’s Take: The BoC may have to invent a new inflation measure to keep its narrative going, perhaps one that only measures prices that move opposite to inflation.

CIBC Capital Markets (Ben Tal interview with RATESDOTCA)

On interest rate expectations: “If inflation takes off...and the Bank of Canada and Fed try to chase inflation because they were late [in tightening monetary policy], they will raise interest rates very, very quickly,” Tal said, noting the Bank of Canada is expected to hike rates a full year ahead of the Fed.

“When you start early [to hike rates]), it’s a good thing…But when you wait and wait and wait and say, ‘You know what, [inflation is] temporary … It's short-lived, it's short-lived, it's short-lived ... I'm sure that people in the 1960s, every month, said that it's short-lived, it's short-lived — until they realized that it's not short-lived." (Source)

The Dot’s Take: The buzz word in economics these days is “transitory inflation.” In fact, all inflation is transitory. Rate hikes ensure that. The question is, how long will the transition last. Core inflation that threatens to exceed 3% for a year or two can do ample damage…and take rates higher than many expect.


On central bank monetary policy: “Despite generally positive economic data, particularly out of the U.S., the bond market entered a consolidation phase in April, putting an end to the persistent selling seen since the start of the year…. But with the Fed maintaining a dovish tone in the face of these developments—it still isn’t ‘talking about talking about’ tapering its QE program—yields can only rise so much.”

“While investors are waiting for signals from the Fed, the Bank of Canada is going its own way, tapering its QE program in April and indicating rates might have to increase next year… We now expect both the BoC and Fed will raise policy rates by 50 basis points in 2022, while the other central banks we monitor are likely to remain on hold.” (Source)

The Dot’s Take: Of course, the Bank of Canada never hikes rates just 50 basis points.


On inflation: “The BoC’s clear pandemic-era emphasis upon not pulling back on the reins until we have a 110% inclusive recovery because we won’t get durable inflation until that point is being tested by persistent upsides to inflation tracking compared to what they thought would happen when all this stimulus was first put into place… After years of undershooting its targets, Canadians need to hear quite soon whether the BoC is comfortable with a sustained make-up strategy or whether 2% is indeed the goal in this cycle.” (Source)

The Dot’s Take: Inflation and the BoC are having a staring contest. Bet on the BoC blinking first because hiking rates too late is worse than hiking rates too early.

Today's Featured RatesUpdated 12:52 ET on Jul 18, 2024

Rates are based on a $300,000 mortgage.

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3 Yr Variable
Loan to value
80.01% to 95%
Rate held until
Oct 19
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5 Yr Variable
Loan to value
80.01% to 95%
Rate held until
Nov 18
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5 Yr Fixed
Loan to value
80.01% to 95%
Rate held until
Sep 04

Latest Rates & Forecasts

  • Overnight Rate: 0.25% [1]
  • Next Bank of Canada rate decision: June 9, 2021
  • Neutral Rate (BoC Estimate): 1.75% to 2.75% [2]
  • BoC Rate Changes Expected by Year-end 2021: None [3]
  • Prime Rate: 2.45% [4]
  • Prime Rate Forecast (Economist forecast at year-end 2021): 2.45% [5]
  • 5-year Government Yield (Economist forecast at year-end 2021): 1.30% [6]
  • 5-year Government Yield (Forward rate forecast at year-end 2021): 1.80% [6]
  • 5-year Fixed Rate (As of today): 1.99% [7]
  • 5-year Fixed Rate (Forward rate forecast at year-end 2021): 2.99% [8]

[1] The overnight rate is the interest rate the Bank of Canada uses to control inflation. It raises the overnight rate to slow inflation and vice versa. The overnight rate is the #1 determinant of prime rate, the basis for variable-rate mortgages.

[2] The neutral rate is the theoretical Bank of Canada overnight rate that neither boosts nor restrains economic growth. It’s updated once a year. (Latest estimate)

[3] This is the implied number of Bank of Canada rate changes based on prices of overnight index swaps (OIS). OIS are bond market derivatives that traders use to bet on the direction of interest rates.

[4] Prime rate is tracked by the Bank of Canada. It equals the typical (mode average) prime rate of the six largest Canadian banks.

[5] This figure equals the year-end 2021 overnight rate forecast from major economists (as tracked by Bloomberg) plus a 220-basis-point spread (which is the current spread between prime rate and the overnight rate).

[6] Average of latest published year-end 5-year yield estimates from BMO (1.05%), National Bank (1.30%), RBC (1.20%), Scotiabank (1.45%), TD (1.40%).

[7] The lowest nationally available uninsured 5-year fixed rate on the date of this publication, as tracked by RATESDOTCA.

[8] This figure equals the projected 5-year Government of Canada bond yield one year from now, as tracked by Bloomberg in the forward rate market, plus a 135-basis-point spread (which is a typical spread between the 5-year yield and the lowest nationally available uninsured 5-year fixed rates).


The RATESDOTCA editorial team are experienced writers focused on sharing stories and bringing you the latest news in insurance and personal finance. Our goal is to provide Canadians with the information and resources they need to make better insurance and financial decisions.

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