On Wednesday night at 22:00, the Bank of Canada announced its interest rate resolution, leaving the benchmark interest rate unchanged at 0.25%, in line with market expectations. The resolution has two major points.
1, the Bank of Canada reduced the size of its asset purchase program to C$3 billion per week, compared to C$4 billion per week previously.
2, the Bank of Canada on the timing of interest rate hikes is expected to advance to the second half of 2022.
After the resolution was announced, the dollar fell more than 100 points against the Canadian dollar in the short term, and then at 22:20 once lost the 1.25 mark. Before the resolution was announced, the dollar against the Canadian dollar had a short pull of 35 points. Canada’s 2-year Treasury yield rose 4.4 basis points to 0.339%, a new high since June last year.
The Bank of Canada said the change in weekly bond purchases reflects the progress of the economic recovery. Despite the improved economic outlook, the Governing Council believes that there is still considerable excess capacity and that the recovery still requires special monetary policy support.
The central bank remains committed to keeping the policy rate at an effective lower bound until economic weakness is absorbed so that the 2% inflation target can be achieved in a sustainable manner.
In terms of economic expectations, the Bank of Canada expects GDP growth of 6.5% in 2021, 3.7% in 2022 and 3.2% in 2023. the January forecasts were 4.0%, 4.8% and 2.5% respectively.
On the inflation front, the Bank of Canada expects inflation to reach its target in 2022. Over the next few months, inflation is expected to temporarily rise to the top of the control range of 1-3%, but the central bank noted that this is largely due to base effects.
The Bank of Canada said inflation will be above target in the second half of this year, before falling to the 2% target, then falling further in the first half of 2022, and finally reaching around 2% in the second half of next year.
The dollar has weakened sharply against the Canadian dollar as the Bank of Canada scaled back its bond purchases and brought forward the timing of interest rate adjustments from 2023 to the second half of 2022, financial website Forexlive said. The next target range is 1.2493-1.2501, and if it falls below that level, traders will be looking at lows between 1.2470-1.2477 this week and last.
In the press conference that followed
Bank of Canada Governor McCollum said that the Bank of Canada has more confidence in the underlying strength of the economy and that further quantitative easing adjustments will reflect the strength of the recovery. The adjustments to the quantitative easing program reflect what we have seen in the economy so far, with real estate and business showing impressive resilience. If forecasts are correct, the Bank of Canada may ease quantitative easing further.
He also said that the third wave of the epidemic has introduced new uncertainty and that further adjustments to the Bank of Canada’s quantitative easing program will be gradual.
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