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Bank of Canada Governor Tiff Macklem and his colleagues face the challenge of whether the time has come to start raising interest rates despite the rise of the variant.BLAIR GABLE/Reuters

The Bank of Canada is about to be flooded with new data that will inform this month’s potentially pivotal decision on interest rates. The question is how much of it will be drowned out by the COVID-19 pandemic’s newest tidal wave.

Between now and Jan. 26 – the date of the central bank’s rate announcement and quarterly Monetary Policy Report, a key document updating the bank’s economic and policy outlook – a cluster of economic releases will shed considerable light on the rate decision. The bank is about to get critical updates on the state of employment (this Friday) and inflation (Jan. 19), the two most important factors paving the monetary policy path in 2022. It will receive important data on the state of manufacturing, international trade, consumer demand and housing markets.

Meanwhile, the bank’s own quarterly surveys of business and consumer sentiment – to be published on Jan. 17 – will provide crucial insight into key factors such as inflation expectations and spending plans. In normal circumstances, those could tip the scales in the decision facing the bank’s policy-setting Governing Council on whether the time has come to start raising interest rates.

And yet those new data points, which tell the economic story as it existed only a few weeks ago, suddenly look like historical artifacts in the light of the Omicron reality in early January. Bank of Canada Governor Tiff Macklem and his colleagues face the challenge of assessing whether that story remains intact despite the rise of the variant, or has been superseded by the pandemic’s latest threat.

The numbers themselves will almost certainly make a strong case for the bank, at the very least, to signal that it’s clearing the track to raise rates by spring. Some economists say the time for rate hikes is already here.

Mr. Macklem has acknowledged that inflation – running at 4.7 per cent year-over-year in November, its ninth consecutive month above the bank’s target of 2 per cent – is a longer-lived problem than anticipated. The bank spent the final weeks of 2021 dropping hints that its patience with inflation is wearing thin, and that it is now acutely sensitive to any further price pressures.

The labour market looks, increasingly, to be the key source of those risks. By many measures, Canada is very close to full employment, and wage gains have shown signs of accelerating. Those are textbook conditions for rising inflation – and for the central bank to start raising interest rates.

Omicron tosses a wrench into that machinery. But it’s unclear what directions it will ricochet.

The jury is still very much out on how we can expect Omicron to affect the Canadian and global economies – not only because of the uncertainties ahead, but because of the mixed signals from our past experience. The economy’s relationship with each major COVID-19 wave has been complicated.

We have seen waves of the virus slow economic activity; but we have also witnessed increasing resilience and a capacity for rapid recovery from each pandemic-induced slowdown. That said, last spring’s third wave featured both an economic contraction in the second quarter and rising inflation, as containment measures collided with strained supply chains and distortions in consumer appetites.

We can probably assume that Omicron will hinder economic growth in the first quarter, but whether it’s a little or a lot is anyone’s guess. Restrictions aimed at containing the spread could exacerbate still-substantial strains on the manufacturing and transport of goods, while limiting consumers’ choices – potentially fuelling inflation. At the same time, though, the reduction in economic activity should ease some inflationary forces.

Most economists figure we can weather the Omicron storm without throwing the recovery significantly off course, based on the resilience we’ve seen to past waves. It’s more than wishful thinking, but less than certain.

It’s in that ill-defined territory that the Bank of Canada finds itself operating. It might be facing an economy straining at the limits of its labour capacity, but entering slower growth. The near-term inflationary risks could go either way, but with inflation already running hot, the upward risks speak louder. The growth path looks impeded, but (knock on wood) may ultimately not be slowed much.

Whether the Bank of Canada anticipated this sort of detour or not, it has already prepared a route that will allow it to take a step forward in three weeks’ time, without rushing straight into rate hikes.

Mr. Macklem made comments in a media conference last month that suggested that before the bank starts raising rates, it would first drop its “forward guidance”: its pledge, embedded in each rate announcement for the past 18 months, to keep its key interest rate unchanged “until economic slack is absorbed so that the 2 per cent inflation target is sustainably achieved.”

That looks like a prudent first step. Dropping the guidance statement in the January announcement would place hikes at the centre of the table for future rate decisions, while giving the bank wiggle room to allow the Omicron fog to clear. That wiggle room may prove highly valuable at this stage.

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