The Bank of Canada announced that it will reduce the size of its bond purchase program by a quarter and hinted that it may raise interest rates earlier than the end of 2022, reflecting the Bank’s hawkish stance and taking the first major step toward withdrawing special stimulus measures in response to the epidemic.
The Bank of Canada said in a statement on the 21st that it will reduce the size of its weekly bond purchases from the current C$4 billion to C$3 billion ($2.4 billion), but will keep the main overnight rate unchanged at 0.25%.
The central bank statement noted that the Canadian economy will be completely rid of the impact of the epidemic sooner than expected, a shift that could prompt policymaking officials to raise the main benchmark rate as soon as next year, rather than not taking any action until 2023, as previous guidance said.
This is a pretty hawkish message from the Bank of Canada,” said Harvey, a senior foreign exchange analyst at Monex Canada, which inspired the Canadian dollar to close 0.9% higher at 1.2497 to the U.S. dollar on the 21st. They are clearly quite confident that the economic recovery will be strong once the current epidemic subsides.
The stance of the latest statement is more hawkish than market expectations, which also shows that the Bank of Canada is eager to quickly embark on a policy normalization process that could take years to complete. The latest action is also one of the biggest steps forward in withdrawing stimulus among developed countries. The Federal Reserve said only last week that it expects to reduce the size of its bond purchases before raising interest rates, but did not indicate when it would begin to reduce the size.
In its monetary policy report, the Bank of Canada said: “We remain committed to maintaining the policy rate at the lower end of the effective range until idle capacity is fully absorbed and inflation continues to reach the 2% target. This is expected to happen sometime in the second half of 2022,” according to the Bank’s latest forecast.
In its latest quarterly economic forecast, the Bank of Canada raised its forecast for economic growth in 2021 by more than 2 percentage points to 6.5 percent, while forecasting that the supply surplus will be absorbed earlier than 2022.
The Bank of Canada president cut Macklem (Tiff Macklem) told reporters after the resolution that while the central bank is committed to not raising interest rates until the economy returns to operating at full capacity, there is no guarantee that borrowing costs will climb when conditions are met.
When those conditions are met, we will assess then,” Macklem said. It’s not mechanistic. We will seek a full recovery and will not count the chicks before the eggs hatch (premature optimism).
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