Why did the BoC decide against raising rates in January?

The BoC left interest rates unchanged at 0.25% at its meeting on January 26. The central bank’s decision defied market expectations and caught many investors off guard.

While the Bank of Canada (BoC) chose to leave interest rates unchanged, the communication from the bank’s Governor Tiff Macklem was far from dovish. All signs point to a central bank intent on hiking rates soon, probably in March, and many times after—at least, that appears to be their current intention.

Key quotes from Governor Macklem’s video press conference that seemed aimed at communicating multiple hikes ahead include:

“Everybody should expect interest rates to be on a rising path.”

“We've been very clear that we are announcing a significant shift in policy and to expect a rising rate path and the time for emergency policy is gone.”

“When we say 'a path,' it does not mean one move, it means a number of steps.”

The BoC also updated its range of forecasts, which are supportive of more interest-rate hikes ahead. Importantly, GDP was revised higher, from 3.7% to 4.0% for 2022 and from 3.3% to 3.5% for 2023. Inflation was also revised upward, to 4.2% for 2022 and 2.3% for 2023. Both of these revisions are consistent with hikes ahead.

Latest economic forecast from the BoC 



GDP growth 4.0 3.5
Inflation 4.2 2.3
Source: Bank of Canada (BoC), January 26, 2022.

So why not hike rates?

While there’s no shortage of commentary suggesting that the BoC lost its nerve at the eleventh hour, we think there are valid reasons why the bank decided against pulling the trigger this time.

The technical reason for holding fire is that the bank had been consistently noting in its policy statements (since early on in the crisis) that it was “committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.” Indeed, the central bank didn’t indicate at the time that economic slack had already been fully absorbed.

This sentence has since been removed from the January statement, and in its place, the following was added: “a broad set of measures are now indicating that economic slack is absorbed.” Had the BoC hiked rates in January, it would have undermined the credibility of its forward guidance tool, a key component of its monetary policy tool kit. In our view, delaying the rate hike by five weeks should have no particular bearing on the Canadian economy or inflation, but it does keep the central bank’s credibility intact.

"While there’s no shortage of commentary suggesting that the BoC lost its nerve at the eleventh hour, we think there are valid reasons why the bank decided against pulling the trigger this time."

A more subjective (but also plausible) view would be that the Omicron variant and associated public health measures shut down a significant segment of the Canadian economy in January, which heightened uncertainty. While it appears that the central bank has judged that the variant will have only a temporary effect on growth, we won’t really know until economic data is available. We should have a much better perspective on Q1 growth and whether Omicron is indeed just a one-off factor by the March meeting.

How many rate hikes, and when?

The market is now pricing in between five and six hikes from the BoC in 2022.¹ In practical terms, that would mean hiking at every BoC meeting except one, plausibly in the summer, during which further balance sheet tightening would be announced. Markets are expecting the bank to be more aggressive than the U.S. Federal Reserve (four to five hikes), where inflation is actually higher relative to Canada.

"The global macro backdrop should also make it more difficult to raise rates despite the desire to normalize policy."

Our current thinking—which is some distance from the consensus view—is that the BoC can only manage to hike twice this year because growth and inflation are likely to slow materially in the coming months. The global macro backdrop should also make it more difficult to raise rates despite the desire to normalize policy. The risk to our view is that the BoC remains steadfast and chooses to normalize policy regardless, focusing implicitly on dampening the housing sector and withdrawing extraordinary levels of support now that the economy is no longer in crisis. If so, then more rate hikes are indeed possible (but as a result, that would necessitate a lower growth profile and a downgrade in our own forecasts for GDP).

Crucially, we believe the market has been priced to perfection—at this point, it’s difficult to see how the markets will price in even more rate hikes. As such, we believe the risks to market pricing are on the downside.

Our core BoC views

We maintain that the BoC has limited influence on the current levels of inflation, with the exception of housing; yet housing isn’t the primary driver behind the elevated inflation levels in Canada. Monetary policy has virtually no influence on supply factors, be it ports, truckers, weather, global trade policies, or COVID-zero policies. While higher rates can dampen demand, it’s worth noting that even the demand element of demand-supply mismatches that are pushing prices higher are global in nature. When Governor Macklem said that the BoC “can and will” control the cost of living, we believe that he’s mistaken: Monetary policy can’t—and won’t—be the reason inflation will ease later this year.

We also struggle to understand how some commentators can expect the bank to raise rates by five or six times this year without expecting a commensurate decline in growth. The Canadian economy is very sensitive to interest-rate movements, probably now more than in recent years, given its record reliance on the housing sector. In our view, the Canadian economy simply cannot comfortably absorb five to six rate hikes this year and a couple more in 2023. This is also what the bond market is telling us: The Canadian yield curve is continuing to flatten aggressively. 

1 Bloomberg, as of January 28, 2022.

Important disclosures

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here.  All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice.  This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.

Manulife Investment Management

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional

Australia: Manulife Investment Management Timberland and Agriculture (Australasia) Pty Ltd, Manulife Investment Management (Hong Kong) Limited. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad  200801033087 (834424-U) Philippines: Manulife Investment Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Manulife Investment Management Timberland and Agriculture Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.

Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.



Frances Donald

Frances Donald, 

Global Chief Economist and Strategist, Multi-Asset Solutions Team

Manulife Investment Management

Read bio
Alex Grassino

Alex Grassino, 

Head of Macro Strategy, North America, Multi-Asset Solutions Team

Manulife Investment Management

Read bio