Tiff Macklem hints on interest rate increases

Since the beginning of COVID-19 pandemic, the Bank of Canada has been purchasing billions of dollars worth of bonds each week. With the help of this measure the BoC has been keeping borrowing costs (and fixed rates, particularly) at a low level.

Last week, the central bank’s Governor Tiff Macklem provided a strategic plan for closing the Bank’s bond-buying program, known as Quantitative Easing (QE).

“As the economic recovery continues, we are getting closer to a moment when we no longer need QE,”- he noted. “However, we haven’t reached that stage yet, and the decision on easing a monetary stimulus will depend on economic changes.”

At the peak of the program, the BoC was buying up to $5 billion worth of bonds per week. The number has gradually gone down to $2 billion. Since March 2020, the central bank has purchased more than $316 billion of Government of Canada debt.

According to Macklem, the Bank is coming closer to the “reinvestment phase”, which will follow the next reduction of the bond buying pace. He says the main goal is to match the level of ongoing purchases to the pace at which bonds are maturing.

This pace is approximately $4 – $5 billion of bond purchases per month.

Although Macklem says the timing of future monetary policy changes will be based on the BoC’s assessment of the economic outlook and the recovery strength, some experts predict the next reduction in bond purchases at the Bank’s next meeting in October.

“In case the recovery will regain the necessary pace during the next seven weeks, the central bank will slow down its pace of QE in October,” – economists from National Bank of Canada said. “Of course, everything will depend on the economic data”.

Before the next rate meeting, the Bank will review one more job market report (in addition to the previous one pointing to 68,500 new full-time jobs added last month) and another month of GDP numbers.

According to Macklem, eventually, the Bank of Canada will close the bond-buying program, reducing its holdings of Government of Canada bonds. Nevertheless, it will happen only after the BoC begins to raise its overnight rate.

“When there’s a reason for decreasing the current monetary stimulus, our first move will be raising our key lending rate”, – he noted. Such a change is expected in the second half of the next year.