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December 9, 2021

Your CFA Update on COVID-19

Bank of Canada holds on rates, warns of elevated inflation

The Bank of Canada kept borrowing costs unchanged, but highlighted strength in the labor market and worries about the persistence of inflation that will likely keep expectations of imminent interest rate hikes intact.

In a statement-only decision Wednesday, policy makers led by Governor Tiff Macklem left the benchmark overnight rate unchanged at 0.25 per cent and reiterated the economy continues to require considerable monetary policy support. 

Still, officials dropped a reference to inflationary pressures being temporary and noted recent job gains have been broad-based, with the employment rate returning to pre-pandemic levels. 

While the language changes from the previous decision were incremental, there’s nothing in the statement that’s likely to derail investor expectations that the Bank of Canada is about to embark on an aggressive campaign of rate hikes. 

“Inflation is elevated and the impact of global supply constraints is feeding through to a broader range of goods prices,” according to the statement, which added that “recent economic indicators suggest the economy had considerable momentum into the fourth quarter.”

The Bank of Canada is at the forefront among Group of Seven central banks in slowing its stimulus efforts. 

In October, it ended its bond-buying stimulus program and accelerated the potential timing of future rate increases amid worries that supply disruptions are driving up inflation. Markets are pricing in rate hikes in Canada next year at a faster pace than the Federal Reserve, which has yet to end its quantitative easing program.

Before Wednesday, investors were pricing in five Canadian increases next year, with a more than 50 per cent chance of a first hike by January. The stand-pat decision was expected by all 22 economists surveyed by Bloomberg News. Markets had put the chances of a hike this week at about a 20 per cent. 

Canadian yields at the front-end of the curve fell on the news, with two-year yields sliding about five basis points to 1.09 per cent. The loonie briefly reversed earlier gains before recovering some ground to trade close to where it was before decision. 

At least one rate hike by the Bank of Canada’s March 2 decision is fully priced in. Some analysts had speculated the central bank would strongly hint at a rate hike at its next decision in late January, which didn’t materialize. That prompted investors to pare back bets on a hike next month.

A report due next week from Statistics Canada may show inflation hitting a three-decade high in November of about 5 per cent. The unemployment rate is near five-decade lows. Employers are struggling to fill positions, and wage pressures are mounting. Home prices, meanwhile, have soared.

In the statement, policy makers cited all of these developments in their assessment of the Canadian economy. 

Constraining the central bank’s ability to move is a commitment not to increase interest rates until the recovery is complete -- something officials projected in October wouldn’t happen until the “middle quarters” of 2022. That means April at the earliest, though new projections will be released in January that could give the central bank more scope to move earlier.

Macklem has also pledged not to sell down the central bank’s holdings of Canadian government bonds until at least the rate hiking cycle has started

Ontario Releases Report to Lead the Future of Work

The Ontario government is releasing 21 recommendations from the Ontario Workforce Recovery Advisory Committee (OWRAC) on making the province the best place to live, work and raise a family. The committee delivered their interim report in the summer, which has led to the passing of first-of-their-kind changes in Canada through the Working for Workers Act, 2021, including requiring most workplaces to have a right to disconnect policy, banning businesses from using non-compete agreements, and making it easier for internationally-trained individuals to practice in their professions.

CFA is reviewing the recommendations to determine next steps.

An initial review of the report suggests that the recommendations should not negatively affect franchised businesses.

CFA will continue to lobby for great clarity on common employer

In the meantime, the CFA will continue to advocate for governments across Canada to adopt a four-factor test that will help determine if a common/joint employer relationship exists or not. The test, which is be advocated for in the US, UK, etc. poses four questions. If the answers are the same for all four questions, then a common employer situation does not exist. If the answers are mixed, then a common employer may exist.  

The four part test looks at

  • Who hires or fires the employee (Franchisor or Franchisee);
  • Who supervises and controls the employee’s work schedules or conditions of employment (Franchisor or Franchisee);
  • Who determines the employee’s rate and method of payment (Franchisor or Franchisee); and
  • Who maintains the employee’s employment records (Franchisor or Franchisee).

Bank of Canada to keep 2% inflation target in new mandate

he Bank of Canada will maintain its 2 per cent inflation target in a mandate review that will be announced in coming days, according to a person familiar with the matter. The new five-year mandate, however, will include some new language around employment, the person said on condition they not be identified because the announcement isn’t yet public. 

Economists weren’t expecting a major overhaul of the 2 per cent target, though there was some speculation that Prime Minister Justin Trudeau’s government would make tweaks that allow the central bank to tolerate higher inflation -- giving it scope, theoretically, to go slower on rate hikes. But any arguments in favor of a big change were weakened as inflation accelerated in recent months, and the focus of policy makers turned toward bringing price pressures under control.

The current mandate expires on Dec. 31. In the past two decades, no review has gone into December. Trudeau’s delay had cast some uncertainty on the timing and pace of the Bank of Canada’s interest rate trajectory.

Right now, investors are pricing in five hikes next year amid growing inflation worries. Governor Tiff Macklem held the benchmark interest rate at 0.25 per cent in a policy decision Wednesday, maintaining guidance that borrowing costs could begin increasing as early as April. 

Bigger options for change that were considered included an explicit dual mandate targeting both employment and inflation, or average inflation targeting like the U.S. Federal Reserve adopted last year that allowed it to overshoot its own 2 per cent target. 

Since the 1990s, the bank has been narrowly focused on a single objective: to keep prices stable. The goal has been to keep inflation within a range of 1 per cent to 3 per cent as much as possible. Operationally, that’s meant aiming for a 2 per cent target over the Bank of Canada’s forecast horizon, a period of about two years.

Because the current system already provides flexibility, many economists are largely supportive of the status quo -- including at the Bank of Canada.

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Ontario to announce new COVID-19 measures for proof of vaccination Friday

Ontario is dropping its tentative plan to end its vaccine passport program in mid-January and will require all proof of vaccination certificates include QR codes according to media reports. 

The measures are to be announced Friday but a senior government official provided the details in advance. 

The official also said there are no plans to shut down the province's schools before the winter holidays one week from tomorrow.

Canada's Food Price Report released

Canada's Food Price Report, released today, is an annual report published by Dalhousie University and the University of Guelph that's the most comprehensive set of data currently available about a subject that all Canadians are impacted by: food.

Supply chain issues caused by the COVID-19 pandemic wreaked havoc on food prices and availability. Weather events such as the heat dome also didn't help put food on the table.

This time last year, the report was forecasting an increase of between three and five per cent for food prices, with a theoretical family of four consisting of one man, one woman, one boy, and one girl, on track to pay about $13,907 to feed themselves in 2021. 

As it turns out, they were only over by $106. The report tabulates that theoretical family ended up spending $13,801 to feed themselves this year.

In the coming year, Charlebois says food price inflation is on track to be higher with a likely increase of between five and seven per cent — or an extra $966 a year for the typical family grocery bill.

"It's the highest increase that we're predicting in 12 years, both in terms of dollars and percentage," Charlebois said. "It's not going to be easy."

As usual, different types of food are expected to go up in price at different rates, with dairy and baked goods expected to be comparatively much more pricey, while past culprits like meat and seafood will look comparatively flat.

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