Bank of Canada Ends Bond Purchase Stimulus and Signals Slightly Earlier Interest Rate Lift-Off Timing

October 27, 2021

Canada’s policy interest rate has been at 0.25% since a trio of 50-basis point reductions in March 2020. While significant progress has been achieved toward economic and labor market recovery, that task has not yet been sufficiently completed. Various areas of the labor market are not yet all the way back to pre-pandemic conditions. Canada’s output gap last quarter is estimated at between negative 1.25% and -2.25%, which is somewhat less than anticipated three months ago. According to today’s monetary policy statement, the likeliest timing for an initial interest rate hike now appears sometime in the middle two quarters of 2022, which is a modest tweak from the prior estimate of the second half of the year.

The Bank of Canada accommodative policy stance has for some time been augmented by a program of bond purchases, the weekly pace of which was previously scaled back from C$ 5 billion to C$ 4 billion in October 2020, then C$ 3 billion in January and even more recently to C$ 2 billion after the July meeting three months ago. The most notable decision at this month’s review was to end that program, although officials are still committed to replacing those bonds in the program that mature.

The termination of new bond purchases is not surprising in light of higher CPI inflation, which has climbed to an 18-1/2 year high of 4.4% as of September, and according to today’s statement¬†and quarterly Monetary Policy Report, likely to crest further later this year to around 4.8%. Inflation primarily reflects supply-side bottlenecks and the higher cost of energy, and official to not expect the 2% medium-term target to be again secured until late in 2022. So the downward climb of inflation will be more gradual than its ascent, and risks around the central bank’s latest forecast are evenly balanced. Canadian real GDP, meanwhile, is forecast to expand 5.1% this year (a downward revision from 6% projected in July’s MPR), then 4.25% in 2022, which is also a downward revision.

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

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