The Bank of Canada ended its bond-buying stimulus programme and accelerated the potential timing of future interest rate increases amid worries that supply disruptions are driving up inflation.
In a statement on Wednesday, policy makers led by Governor Tiff Macklem announced they would stop growing holdings of Canadian government bonds, ending a quantitative easing program that has poured hundreds of billions into the financial system since the start of the Covid-19 pandemic.
They also signalled they could be ready to hike borrowing costs as early as April, as supply constraints limit the economy’s ability to grow without fuelling inflation.
The Canadian dollar soared and bonds were hit hard. The loonie jumped to C$1.2321 per US dollar yesterday, up more than 0.5%. Two-year benchmark yields rose about 20 basis points to 1.065%.
Macklem maintained his pledge not to raise the benchmark overnight policy rate until the recovery is complete, but officials now believe that will happen in the “middle quarters” of 2022, rather than the second half of next year as previously thought. The language will reinforce market expectations the Bank of Canada is poised to quickly pivot to a tightening cycle amid growing price pressures. Investors are anticipating the Canadian central bank will start raising interest rates within the next six months, with markets pricing in four rate hikes next year.
“Shortages of manufacturing inputs, transportation bottlenecks, and difficulties in matching jobs to workers are limiting the economy’s productive capacity,” policy makers said in the statement. “Although the impact and persistence of these supply factors are hard to quantify, the output gap is likely to be narrower than the bank had forecast.”
The Bank of Canada released details of how it will implement the “reinvestment phase” of bond purchases in a market notice. It said it would maintain keep its total stock of government of Canada bonds roughly constant, reducing its purchases in the primary and secondary markets. Most recently, weekly bond purchases had been C$2bn. Macklem is scheduled to provide more insight into his policy decision at a press conference.
The Bank of Canada has been using two major tools to keep borrowing costs low: maintaining its policy interest rate near zero and buying up Canadian government bonds from investors to keep longer-term borrowing costs in check.
The benchmark interest rate was left unchanged at 0.25% on Wednesday. The central bank has increased its bond holdings by about C$350bn since the start of the pandemic.
The more hawkish tone at the bank on Wednesday comes even amid a less rosy outlook for the economy. The central bank cut its growth estimates for both 2021 and 2022, but officials said much of that reflects worse-than-expected supply disruptions in the global economy.
Because of those disruptions, the Bank of Canada marked down estimates of “supply” by more than their downward revisions to output.
That means the central bank now sees less excess capacity in the economy, and less reason to accommodate demand with cheap borrowing costs.
The build-up of inflationary pressures also appears to be testing the Bank of Canada’s patience. The Bank of Canada revised higher its forecasts for inflation – to 3.4% in both 2021 and 2022.
“The main forces pushing up prices – higher energy prices and pandemic-related supply bottlenecks – now appear to be stronger and more persistent than expected,” policy makers said. “The bank is closely watching inflation expectations and labour costs to ensure that the temporary forces pushing up prices do not become embedded in ongoing inflation.”
LEAVE A COMMENT Your email address will not be published. Required fields are marked*
GCC IPO pipeline remains strong in 2022: Kamco
ExxonMobil Qatar recognises Qatargas 'outstanding' safety performance at Laffan Refinery
Globalisation, technology among growth drivers for VCs, says industry expert
QSE declines 0.19% on domestic funds’ net selling
Al-Kuwari participates in 115th extraordinary meeting of GCC Financial and Economic Co-operation Committee
Commercial Bank wins ‘Best Trade Finance Provider in Qatar’ award by Global Finance for 2022
Rising confidence in Qatar banking sector stability seen in QCB's Risk Perception Survey 2021
Saudi Arabia will remain top driver of Middle East IPO deals, says Goldman
Wall Street investors shelter in banks as Fed rate hikes loom