Bank of Canada stops bond-buying program and signals that rates will start growing sooner

On Wednesday, the Bank of Canada announced the end of its bond-buying stimulus program, pushing the potential timeline for future interest rate hikes closer amid concerns over supply disruptions supporting inflation.

Governor Tiff Macklem stated the BoC stops growing holdings of Canadian government bonds, closing a quantitative easing program that has directed hundreds of billions into the national financial system since the beginning of the COVID-19 pandemic.

In addition to it, the central bank signaled it could be ready to start raising borrowing costs in April, as supply constraints reduce the possibilities for economic growth without increasing inflation.

Macklem reiterated that it will not raise the Bank’s key lending rate until we reach the full recovery. However, now it’s expected to happen in the “middle quarters” of 2022, and not in the second half of the next year as earlier said.

Such a tone will reinforce market forecasts about the BoC beginning a tightening cycle sooner amid growing price pressures. Investors expect the Bank to start raising rates during the next six months. According to them, we’ll see four increases in 2022.

In its Monetary Policy Report, the central bank says upside risks to inflation have become a stronger concern as price increases are exceeding the Bank’s 1-3% control range. The Bank of Canada revised its forecasts for inflation and now predicts 3.4% in both 2021 and 2022.

“In our opinion, the BoC will raise its overnight rate three times next year, pushing it to 1% by the end of 2022,” – economist Sri Thanabalasingam with TD Bank noted. “Inflation is heating up, and it would be quite reasonable to remove part of the monetary stimulus as the economy is recovering.”

Meanwhile, Doug Porter with Bank of Montreal believes we’ll see more increases.

“The key lending rate was kept unchanged this time at 0.25%, but almost every other aspect of the release was filled with worries over inflation,” – he says.

“We believe rate increases will happen quarterly until late 2023, pushing the overnight rate back to pre-pandemic levels in two years.”


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