Higher interest rates are coming. Omicron is unlikely to change that

As Canada's federal government prepares for another encounter with COVID-19, Canadian borrowers must face a second hazard: the prospect of a sharp rise in interest rates in 2022.

While the world's most powerful central banker, Jerome Powell, warned on Wednesday that a new variant capable of smashing through vaccine defences could check the U.S. Federal Reserve's plans to cut stimulus, so far it appears Omicron is not that variant.

As yet, the Fed's interest rate remains unchanged at below one quarter of a per cent.

But in what's being described as a major about-face to crack down on inflation, Powell announced the central bank will double the pace at which it slows its bond buying, leaving the Fed open to begin raising interest rates as soon as April.

And estimates by Fed officials who make monetary policy decisions are that the bank will raise interest rates three times in 2022, leaving room for other central banks, including the Bank of Canada, to do the same.

Asked whether the Omicron version of the COVID-19 virus now sweeping through the world could block the central bank's plans to roll back stimulus, Powell said that so far, his judgment was that the U.S. economy's vitality would not be diminished by the new variant.

"The early assessment is highly transmissible, perhaps not as severe," he said. "It may well come to the United States and replace Delta as the dominant variant fairly quickly."

But after experience with the Delta variant, the Fed chair seemed confident the economic effect on the U.S. would be small.

"I do think wave upon wave, people are learning to live with this," he said.

And Powell said powerful job creation, a vibrant economy and soaring inflation mean the U.S. central bank has little choice but to end stimulus and crack down on inflation.

The Federal Reserve is only now catching up with Canada. At a news conference of his own earlier in the day, Bank of Canada governor Tiff Macklem, after saying he was uncomfortable with inflation at these levels, was asked why he didn't take action.

"We are taking action," Macklem replied briskly. "We tapered and we ended Q.E."

Quantitative easing, or Q.E., is another term for the stimulative bond-buying that the Fed is only now promising to end by spring. Despite a determination by the Canadian central bank to act independently from its larger counterpart in Washington, it can be difficult for the Bank of Canada to raise interest rates much before the Fed does.

When Canadian rates rise faster than those of the U.S., the move of hot money into the loonie pushes the Canadian dollar up, making Canadian exports more expensive around the world. A decision by the Fed to raise interest rates will free up Macklem to act as well without the worry of damaging Canadian export trade.