Bank of Canada is expected to keep reducing the economic stimulus

The central bank will hold its rate meeting on Wednesday, and many expect it to keep reducing its economic stimulus due to growing optimism on the pace of recovery.

According to a poll of 17 economists, the Bank of Canada will cut its weekly purchases of Canadian government bonds by one-third to $2 billion (US$1.6 billion).

The BoC is expected to keep its key lending rate unchanged at 0.25%, but traders believe rates will start rising in 2022. Investors are pricing in one increase during the next 12 months, and predict 4 hikes over the next two years. As a result, the overnight rate in Canada will be one of the highest among advanced economies.

A stimulus reduction will mark the third time the Bank has cut its asset purchase program since the end of 2020, as the national economy is heading towards a full recovery from the pandemic. The Governor Tiff Macklem may be the first among his colleagues to start reducing stimulus. The BoC said it plans to normalize its government bonds purchases before it addresses the issue of rate hikes.

According to Veronica Clark, an economist at Citigroup Global Markets Inc., the Bank is “encouraged by the recovery process”.

As you know, the central bank has already cut its weekly purchases of government debt by 40% to $3 billion. It plans to keep reducing it as long as the economy is on recovery path, and then to remove it entirely by the next year. New forecasts will be released on Wednesday, and they can clear the situation up.

In addition to it, business and consumer confidence (as well as commodity prices) are at record high levels.

Households have increased their savings, and there is also plenty of fiscal stimulus, including benefits from the U.S. spending. The pace of vaccine rollout is accelerating and jobs growth in June is pointing to the fact that Canada’s economy has recovered from the influence of the recent lockdowns.

The BoC says the latest inflation hike is only temporary. Following the path to normalizing monetary policy will make sure the situation doesn’t change.