Bank of Canada pares bond purchases, sees rate hikes earlier

  4/21/2021 |   SHARE
Posted in Canadian Economy and Interest Rates by Heather Lemieux| Back to Main Blog Page

Bank of Canada pares bond purchases, sees rate hikes earlier

The Bank of Canada announced that it will pare back asset purchases by one-quarter and indicated that it’s moving up its expected timeline for interest-rate hikes, citing a stronger-than-expected rebound from the pandemic.

The Ottawa-based central bank will reduce its purchases of federal government bonds to $3 billion (US$2.4 billion) a week, from the current pace of $4 billion, policy makers led by Governor Tiff Macklem said Wednesday in a written statement. They also said the economy would fully heal from the pandemic more quickly than expected, a track that could prompt them to raise their key benchmark interest rate as early as next year versus previous guidance pointing to no move before 2023.

The statement was more hawkish than expected, suggesting that the central bank is keen to quickly start a process of policy normalization that could take years to finish. The move is one of the biggest steps yet by a developed country to reduce emergency levels of monetary stimulus.

“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 per cent inflation target is sustainably achieved,” the bank said in its Monetary Policy Report. “Based on the Bank’s latest projection, this is now expected to happen some time in the second half of 2022.”

In new quarterly economic projections, the Bank of Canada revised higher its growth estimate for 2021 by more than two percentage points, to 6.5 per cent, and brought forward into 2022 its forecasts for when excess supply would be absorbed.

Projections for economic slack are a critical input into their forward guidance, which is not to raise raise their key benchmark interest rate, currently at 0.25 per cent, until the economy has fully recovered and inflation is sustainably at two per cent.

The growth revisions bring them more into line with economist projections. Markets had already been pricing in a rate increase in 2022 before today’s forecast changes.

The Canadian dollar jumped 0.5 per cent to $1.255 per U.S. dollar. The market consensus was for the Bank of Canada to pare back its government of Canada bond purchases to $3 billion a week, without altering expectations for no rate hike before 2023.

The central bank is still underscoring it needs to remain cautious. It said there’s more uncertainty than usual around its estimates for slack. Officials also highlighted concern about the uneven recovery and the potential for scarring in the labor market.

Just on technical grounds, it needs to be pared back as the government’s financing requirements drop. Its quantitative easing program is too large given the size of Canada’s bond market.

It now owns more than 40 per cent of outstanding bonds and is on pace to go above 50 per cent in a few months as Prime Minister Justin Trudeau’s government reduces its issuance by about $90 billion this year.

Source: BNN Bloomberg

Bank of Canada, Bank of Canada Benchmark Rate, Interest Rates, Mortgage Rate Forecast, Mortgage Rates Canada, Variable Rate Mortgages

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