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The Bank of Canada is not expected to announce any changes to monetary policy this week.Chris Wattie/Reuters

Economists increasingly expect the Bank of Canada to begin raising interest rates as early as April, as employment rebounds smartly, wage growth picks up and inflation remains well above the central bank’s target range.

Nonetheless, concerns about the Omicron variant of COVID-19 and the impact of the floods in British Columbia will hang over the bank’s rate decision on Wednesday, forcing it to balance positive labour market developments against an uncertain economic outlook, analysts say.

The bank is not expected to announce any changes to monetary policy this week. But analysts will be watching for hints about the timeline for coming interest rate hikes. At the last rate decision in October, the bank said it expects to start raising its policy interest rate sometime between April and September.

After November hiring spree, Bank of Canada seen raising rates sooner

“Were it not for the latest COVID curveball, it would seem like an open field for the bank to start laying the groundwork for rate hikes out of the gate in 2022,” Douglas Porter, chief economist with Bank of Montreal, wrote in a note to clients.

“Between 4.7-per-cent inflation [in October], a tight jobs market, torrid housing, and a cool currency, there is little standing in their way,” he said.

A strong jobs report from Statistics Canada on Friday adds to the argument that the economy is operating close to its potential and rates should start going up soon. Canada added 154,000 positions in November after a gain of 31,000 jobs in October. That’s more than four times what Bay Street analysts had projected.

The unemployment rate fell to 6 per cent from 6.7 per cent, putting it within striking distance of the prepandemic rate of unemployment.

The bank has maintained an ultra-expansionary monetary policy since early in the pandemic, holding its overnight interest rate at 0.25 per cent and promising not to raise rates until “economic slack is absorbed.” With annual consumer price index inflation running above the bank’s target range of 1 per cent to 3 per cent since April, pressure to tighten monetary policy is building.

The bank ended its quantitative easing program – where it was buying billions of dollars’ worth of government bonds each week to hold down interest rates – in October. It’s now in what it calls the “reinvestment phase,” where it is no longer expanding the size of its balance sheet, but is still buying bonds to replace assets as they mature.

With employment surging, wages have begun to pick up. Bank of Canada officials have maintained in recent months that wage growth is not feeding into general inflation. But Stephen Brown, senior Canada economist with Capital Economics, said recent wage data show this is “quickly becoming the wrong narrative.”

“You’re looking at annualized [hourly wage growth] right now of more than 5 per cent over the last couple of months,” Mr. Brown said in an interview.

“The central bank isn’t going to move on two months of data. But if we see that again in December and January – and I think there’s a pretty strong chance that we will – then by early February the bank is probably going to lean more toward the April meeting for a rate hike,” he said.

Other central banks have become increasingly hawkish in recent weeks. U.S. Federal Reserve chair Jerome Powell said last week that it was no longer appropriate to use the word “transitory” when describing the current bout of high inflation. He also said that Fed policy-makers will likely discuss accelerating the end of quantitative easing at their next meeting in December.

The Omicron variant complicates the outlook for the Canadian and global economy. It remains unclear how infectious and dangerous the mutation is, or what steps governments might take to curtail the spread of the variant.

It’s also unclear whether another wave of shutdowns would be inflationary or deflationary. Widespread health restrictions could hit oil prices and demand for in-person services, putting downward pressure on prices. But lockdowns could also hit already-stressed supply chains, putting upward pressure on prices.

“The epidemiologists we hold in highest esteem are willing to admit that they just don’t know much yet,” Avery Shenfeld, Canadian Imperial Bank of Commerce’s chief economist, wrote in a note to clients.

“Those of us who are charged with forecasting the economy’s twists and turns should have an equal degree of humility for a few weeks. That should be true for the Bank of Canada in its announcement. ... It can offer up an even more positive outlook, and signal rate hikes are coming, but the language surrounding that forecast should sound much less certain until we have more information about that mutated elephant in the room,” he said.

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