Bank of Canada may reduce its assets purchases as the economy shows strong recovery

The central bank may start reducing its stimulus in the nearest future, as Canada’s economy shows an unexpectedly strong rebound, and the first hints concerning the BoC’s next moves could appear this week already.

Economists expect the Bank of Canada to keep its key lending rate unchanged at its next meeting on Wednesday. Nevertheless, some believe there could be certain hints on reducing the Bank’s asset purchases at the next meeting in April.

Although Macklem says the BoC will make this move only when the economy recovers, we can see it growing much faster than the central bank had predicted, increasing the pressure on it to act.

“They’ll have to reduce purchases someday,” – Veronica Clark, economist at Citigroup Global Markets Inc. in New York, noted. “It’s a significant volume of accommodation.”

We’ve seen many changes since the BoC’s previous rate meeting on Jan. 20, when there was even a possibility of a rate cut aimed at fighting a small downturn.

But winter lockdowns turned out to be less harmful than many expected, and Canada’s vaccine program is rolling out faster than we’ve predicted a few months ago. In addition to it, a huge US$1.9 trillion stimulus plan in the U.S. will also support the economy of Canada’s biggest trading partner.

That’s why economists have been increasing their growth forecasts: the latest one is 5.4% for this year, while the Bank predicted only 4% in January.

Of course, a rate hike is not imminent right now. The central bank has said there won’t be any rates until the damage to Canada’s economy from the pandemic is fully offset. Nevertheless, investors are betting on the time when it may happen. On Tuesday, markets were pricing in more than a 50% possibility of an increase in March 2022, while it was only 25% before the Bank’s previous meeting.

However, before a rate hike, the Bank of Canada will start reducing its asset purchases.

As you know, the BoC has been purchasing a minimum of $4 billion in federal government bonds each week in order to help keep borrowing costs low. As the economy is recovering faster than expected with a possibility of it absorbing all excess slack by 2022, such purchase volumes may be over soon.