The Bank of Canada has announced that it will begin easing the monetary stimulus it is providing to the economy and moved up the timing of a possible interest rate hike to the second half of 2022.
Citing a stronger-than-expected recovery from the COVID-19 pandemic, Canada’s central bank announced that it will scale back the purchase of government debt by a quarter to $3 billion a week and accelerated the timetable for a possible interest-rate increase.
It is the biggest step yet by a major economy to reduce emergency levels of monetary stimulus. A return to more normal policy has been resisted by other central banks, including the U.S. Federal Reserve. Investors reacted to the news by boosting the Canadian dollar to its highest level since January of this year.
The central bank reiterated its guidance that it won’t raise its benchmark interest rate, currently at 0.25%, until the recovery is complete and inflation is sustainably at 2%. But it changed its projections on when that would happen.
In new economic projections, the Bank of Canada revised higher its growth estimate for 2021 by more than two percentage points, to 6.5%, and brought forward its forecasts for when slack will be absorbed in the economy to the second half of 2022.
Markets have already priced in an interest rate increase in 2022. Investors have also been anticipating that Canada’s central bank would be more aggressive than the U.S. Federal Reserve in reducing its economic stimulus measures.
Swaps trading suggests a 50% chance of an interest rate hike in Canada this time next year. Almost three rate increases are fully priced in over the next two years, and five hikes over the next three years.
The Canadian dollar rose as much as 0.8% to $1.2510 per U.S. dollar. The market consensus was for the Bank of Canada to pare back its government bond purchases in line with the bank’s new guidance.
