⁍ The BoC has pledged to keep interest rates near zero until inflation is sustainably at its 2% target.

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⁍ Hotter-than-expected inflation tends to raise the rate of return demanded by bond investors.

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⁍ Money markets see about a 50% chance that the Bank of Canada will hike interest rates in 2022.

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– The Bank of Canada is expected to keep interest rates near zero until inflation hits the central bank’s 2% target, a pledge it’s likely to stick to as it seeks an economic recovery that raises prospects for everyone, analysts say. If the bank sees an inclusive recovery as key to achieving that goal, it could surprise financial markets by continuing to support the economy as it returns to its full potential, rather than dialing back to avoid above-target inflation, analysts say. Hotter-than-expected inflation tends to raise the rate of return demanded by bond investors. The Bank of Canada is ‘committing to an inflation overshoot,’ says Royce Mendes, a senior economist at CIBC Capital Markets. “The market doesn’t seem to have grasped that in Canada as they have in the US.” Money markets see about a 50% chance that the Bank of Canada will hike interest rates in 2022. That is much earlier than expected by the Federal Reserve, which unveiled last month a new monetary policy strategy which would aim for inflation to rise above target for some time, making up for past shortfalls. Also, Canada’s yield curve is not nearly as steep as the US curve. A steepening curve, when long-term rates climb further above short-term rates, is seen as a sign of rising inflation expectations. Higher prices tend to hurt lower-income workers the most, but central banks are trying to generate inflation that is driven by rising economic activity rather than reduced supply. People’s purchasing power is not going to be eroded by inflation because “wages are likely to be higher first and probably more so,” Mendes says.