Further Scale-Back of Canadian Bond Buying by Bank of Canada

July 14, 2021

The central bank’s Governing Council kept the overnight rate target at 0.25% and indicated in its statement that such is unlikely to be raised until sometime in the second half of 2022. But the weekly pace of government bond purchases was reduced by a billion Canadian dollars to C$ 2 billion. Such had been cut previously to C$ 4 billion from C$ 5 billion last October and then to C$ 3 billion three months ago. Today’s additional tapering was defended in light of “continued progress towards recovery and the Bank’s increased confidence in the strength of the Canadian economic outlook.”

Today’s council meeting coincides with the release of the quarterly Monetary Policy Report with updated forecasts that project GDP, which plunged 5.3% in 2020, growing 6.0% this year, 4.6% in 2022, and 3.3% in 2023. With potential GDP trending higher by around 1.5% a year and an estimated output gap (measuring the amount of spare capacity) of between -2% and -3% at mid-2021, sufficient reabsorbtion of spare capacity so that the 2 percent inflation target is sustainably achieved is unlikely to occur until 12-18 months from now.

Canadian inflation had climbed to 3.6% by May, but its rise well above target is attributed to temporary factors and thus deemed temporary. Officials expect inflation to remain above 3.0% over the rest of this year but to average 2.4% in 2022 and 2.2% in 2023. Risks to the inflation forecast are considered balanced, and six broad risk factors are identified: another Covid wave, stronger-than-assumed personal consumption, more persistent supply bottlenecks and cost pressures than assumed, weaker exports, a pronounced slowdown of the housing market, and sharply tighter global financial conditions.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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