The Bank of Canada has announced that it is further tapering its bond purchases in a sign of growing optimism about the economic recovery.
Bank of Canada Governor Tiff Macklem said the central bank will reduce its weekly purchases of government debt by one-third to $2 billion.
Additionally, the Bank of Canada announced that it is holding its benchmark overnight interest rate steady at 0.25%, while stating that it doesn’t anticipate any interest rate hikes before the second half of next year (2022).
The decision to taper advances the central bank’s gradual return to more normal policy, which has put the Bank of Canada at the forefront of unwinding stimulus. It’s the third time that Canada’s central bank has downsized its asset purchase program.
"This adjustment reflects continued progress towards recovery and the Bank’s increased confidence in the strength of the Canadian economic outlook" Governor Macklem said in a written statement.
The Bank of Canada’s latest decisions were widely expected by economists and is in line with market expectations of an interest rate hike cycle that starts in the second half of 2022, with multiple increases needed to cool an economy that will likely be running hot through 2023.
While conceding that inflation will remain above 3% for much of the rest of this year, the Bank of Canada said the increase reflects factors such as gasoline prices, base effects from last year’s lockdowns, and supply chain constraints that should fade.
The central bank forecasts consumer price gains falling back down near its 2% target later in 2022 because of lingering excess supply. The economy will be in a period of excess demand by 2023, the Bank of Canada projected in its latest outlook.
