Bank of Canada Reduces Bond Purchases, Hints at Earlier Rate Increase

The Bank of Canada took a more prudent monetary approach on Wednesday, in wake of a better-than-expected labour market recovery.

In a written statement, policy makers led by Governor Tiff Macklem said the central bank will pare back its weekly Government of Canada bond purchases from $4 billion to $3 billion, citing an ongoing strong economic recovery. According to the BoC, the economy and labour market are expected to rebound sooner than previously anticipated, which may prompt a benchmark interest rate hike as early as next year, in contrast to previous guidance which called on stationary rates until at least 2023.

The BoC reiterated its stance of keeping the benchmark borrowing rate at the current 0.25%, until the economy shows signs of a robust recovery and inflation levels remain at the 2% target rate. However, despite its more optimistic projections, the central bank cautioned about existing uncertainty that may have an affect on upcoming economic projections. Policy makers also brought attention to the uneven recovery that has become evident across various sectors of the economy, and the potential for scarring in the labour market.

“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved,”the Bank of Canada explained 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,” the statement continued.

Wednesday’s statement was a lot more hawkish than anticipated, suggesting the BoC is eager to promptly begin the process of policy normalization. The latest move is significantly more vigilant compared to the US Federal Reserve, and marks one of the first major steps among developed countries to cut back on emergency monetary stimulus.

According to the bank’s latest quarterly projections, economic growth for 2021 was revised higher by more than two percentage points, to 6.5%. The new projections are now closer aligned with economists’ forecasts. Following the BoC’s statement, the Canadian dollar increased by nearly 0.8% to around $1.25 per US dollar— the highest since January.

Information for this briefing was found via the BoC. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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