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Exploring Canada’s economic progress report with the Bank of Canada

Vipin Pal, CFA

The rate hike cycle is here! Monetary policy is shifting in Canada and around the world. On March 2, 2022, the Bank of Canada (BOC) raised the policy interest rate from 25 basis points (bps) to 50 bps, in the first rate hike since 2018. A day after the rate hike announcement, Bank of Canada Governor Tiff Macklem spoke to CFA Society Toronto, providing an economic progress report and addressing BOC’s current thinking on future monetary policy.


Inflation Is the Biggest Challenge

Macklem began by acknowledging the tremendous loss of human life and the devastating impact on the Ukrainian people caused by Russia’s invasion of Ukraine. He noted the conflict is also a new source of uncertainty and volatility impacting the global economy.

On March 27, 2020, BOC lowered the interest rate to 25 bps and started buying Government of Canada (GOC) bond holdings to support the economy as it was impacted by the COVID-19 pandemic. The purchase of GOC bonds by the BOC to support the Canadian economy is known as quantitative easing. Quantitative easing effectively keeps borrowing costs low for businesses and individuals. During his address, Macklem noted that the Canadian economic recovery from the pandemic has been impressive. As a result, BOC has started to normalize monetary policy by raising interest rates. Macklem stated, “The timing and pace of further increases in the policy rate, and the start of quantitative tightening, will be guided by the BOC’s ongoing assessment of the economy and its commitment to achieving the 2 percent inflation target.” 1

Consumer price index (CPI) inflation has climbed beyond BOC’s target range of 1 to 3 percent. In January, CPI inflation was 5.1 percent, and in February, CPI inflation rose to 5.7 percent. In a speech in early March, Macklem highlighted that “the Russian invasion of Ukraine is driving up international prices for oil, wheat, and other commodities. This will put further upward pressure on inflation in Canada and around the world. ” 2 The Bank also looks at core inflation metrics: CPI-common,  CPI-median, and CPI-trim.3 CPI-common, which is closely correlated to inflation in services and less influenced by global supply chain disruptions, was only 2.6 percent in February. In contrast, CPI-median and CPI-trim, which have been more influenced by the prices of globally traded goods, were 3.5 percent and 4.3 percent, respectively.

Economic Update

BOC thinks the slack in the economy has been absorbed, which is supported by the Canadian economy posting strong growth in gross domestic product at 6.7 percent in the fourth quarter of 2021. The economy is in a much better shape than it was when BOC started its quantitative easing program, bolstering the case for rate hikes. However, Macklem noted three major shifts in the global economy:

  1. A global shift toward goods and away from services during the pandemic, combined with pandemic-related disruptions in the production and delivery of goods.
  2. An expansion of rising prices to day-to-day supplies like food and energy, impacting consumers everywhere.
  3. The strength of the economic recovery, combined with an overall imbalance between demand and supply.

Supply Chain Issues

During the pandemic, relative price pressures shifted from services to goods. Consumers spent less on services and more on goods. Due to lockdowns, consumers were unable to spend on services such as gym memberships and travel. Instead, consumers spent on goods such as exercise bikes, home office furniture, and electronics to help cope with being stuck at home. This shift in purchasing patterns put upward pressure on the prices of goods.

Pandemic related restrictions and precautions around the world have limited production and slowed the delivery of goods. The shift in purchasing patterns toward goods, along with the limited production and delivery capacity around the world, have resulted in sharp price increases for many goods.

Broadening of Price Increases and Imbalance between Demand and Supply

Increased energy prices from pandemic lows have been contributing to inflation for more than a year. Although energy prices are volatile and don’t impact core inflation in the short term, there is growing evidence of broadening price pressures. One way to look at the breadth of the price pressures is by the number of CPI components seeing high inflation rates. As of January, almost two-thirds of the 165 CPI components were growing above 3 percent. This includes grocery prices, which are up 6.5 percent from last year, with foods that are hard to substitute (beef, chicken, and cereal) all getting more expensive. BOC acknowledged that getting inflation back to target becomes much more costly if inflation expectations become unmoored.  

At the CFA Society Toronto event, Macklem noted that challenges related to getting the economy back to its potential and elevated inflation rates are the result of supply chain disruptions. The economic slack has been absorbed, and BOC will continue to increase interest rates to slow down spending growth, resulting in dampened inflation expectations.

Quantitative Tightening

When quantitative easing began in spring 2020, BOC bought at least $5 billion in GOC bonds each week. But as the economic outlook improved, BOC reduced the pace of GOC bond purchases, and since October 2021, BOC has been reinvesting its GOC bond holdings to keep the size of these holdings stable. Macklem noted that the BOC Governing Council will soon decide when and at what pace BOC will reduce the size of GOC holdings.4 The reduction of GOC bonds holdings from BOC’s balance sheet is known as quantitative tightening. Macklem also notes that quantitative tightening will complement increases in the policy rate.

The expected impact of quantitative tightening and the increase in the policy rate is an increase in short-term and long-term interest rates. Higher interest rates increase the cost of borrowing for individuals and businesses, which reduces demand, eventually leading to reduced inflation in the economy.


BOC is dealing with several uncertainties and challenges but is committed to containing inflation within its target range of 1 to 3 percent. The size and the pace of increases to the policy rate and quantitative tightening will be critical aspects of BOC’s future monetary policy decisions. No matter the outcome of those decisions, we are truly living through a crucial and historical juncture in Canada’s monetary policy. CFA_Toronto_RGB Milly

1 Bank of Canada. “Bank of Canada Increases Policy Interest Rate” [press release]. March 2, 2022.

2 Macklem, Tiff. Economic Progress Report: Controlling Inflation [Remarks, delivered virtually]. Bank of Canada, March 3, 2022.

3 CPI-common is a measure of core inflation that tracks common price changes across categories in the CPI basket. CPI-median is a measure of core inflation corresponding to the price change located at the 50th percentile (in terms of the CPI basket weights) of the distribution of price changes in a given month. CPI-trim is a measure of core inflation that excludes CPI components whose rates of change in a given month are located in the tails of the distribution of price changes. This measure helps filter out extreme price movements that might be caused by factors specific to certain components.

4 On April 13, 2022, BOC noted that “The Bank is also ending reinvestment and will begin quantitative tightening (QT), effective April 25. Maturing Government of Canada bonds on the Bank’s balance sheet will no longer be replaced and, as a result, the size of the balance sheet will decline over time.” Source: Bank of Canada. “Bank of Canada Increases Policy Interest Rate by 50 Basis Points, Begins Quantitative Tightening” [press release]. April 13, 2022

Vipin Pal, CFA, is a volunteer on CFA Society Toronto’s Member Communications Committee.
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