Bank of Canada Ends Bond Purchases Abruptly and Unexpectantly Sending Loonie Sharply Higher

Bank of Canada surprised by ending the QE bomd buyimg program from $2 billion per week to nil, it was expected to cut to $1billion a week. The BoC leftthe key lending rate at 0.25 percent Wednesday as expected.

Bank of Canada surprised by ending the QE bomd buyimg program from $2 billion per week to nil, it was expected to cut to $1billion a week. The BoC leftthe key lending rate at 0.25 percent Wednesday as expected.

Bank of Canada Building

  • The Bank of Canada held the overnight rate at 1/4 per cent.
  • The Bank Rate is correspondingly 1/2 per cent
  • The deposit rate is 1/4 per cent.

Canada Interest Rate

Highlights

  • Lower bound remains at 0.25% and upper bound 0.50%
  • Monthly asset purchases to $0 vs $2 billion prior
  • Extraordinary forward guidance maintained
  • Supply shortages are ‘limiting the economy’s productive capacity’
  • Estimates output gap at -1.25% to -2.25%
  • In the July MPR, the BOC estimated the output gap at -2.0-3.0%
  • In July, BOC saw output gap closing in H2 2022, now sees it in the ‘middle quarters’ of 2022
  • Notes significant uncertainty around output gapS

NB: Assumptions

  • Sees GDP this year up 5.1% this year and 4.3% in 2022
  • Q3 GDP seen at 5.5% vs +7.3% July forecast
  • July Canada GDP estimate for 2021 6.0%, for 2022 4.6% CPI estimate at 3.4% this year and 3.4% in 2022
  • July Canada CPI estimate for 2021 3.0%, for 2022 2.4%
  • US growth in 2021 seen at 5.6% vs 6.6% in July
  • US growth seen at 3.9% in 2022 vs 5.1% in July 

Press conference With Macklem forthwith

 Bank of Canada full rate statement for October  2021

 

The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank’s extraordinary forward guidance on the path for the overnight rate is being maintained. The Bank is ending quantitative easing (QE) and moving into the reinvestment phase, during which it will purchase Government of Canada bonds solely to replace maturing bonds.

 

The global economic recovery from the COVID-19 pandemic is progressing. Vaccines are proving highly effective against the virus, although their availability and distribution globally remain uneven and COVID variants pose risks to health and economic activity. In the face of strong global demand for goods, pandemic-related disruptions to production and transportation are constraining growth. Inflation rates have increased in many countries, boosted by these supply bottlenecks and by higher energy prices. While bond yields have risen in recent weeks, financial conditions remain accommodative and continue to support economic activity.

 

The Bank projects global GDP will grow by 6½ percent in 2021 – a strong pace but less than projected in the July Monetary Policy Report (MPR) – and by 4¼ percent in 2022 and about 3½ percent in 2023.

 

In Canada, robust economic growth has resumed, following a pause in the second quarter. Strong employment gains in recent months were concentrated in hard-to-distance sectors and among workers most affected by lockdowns. This has significantly reduced the very uneven impact of the pandemic on workers. As the economy reopens, it is taking time for workers to find the right jobs and for employers to hire people with the right skills. This is contributing to labour shortages in certain sectors, even as slack remains in the overall labour market.

 

The Bank now forecasts Canada’s economy will grow by 5 percent this year before moderating to 4¼ percent in 2022 and 3¾ percent in 2023. Demand is expected to be supported by strong consumption and business investment, and a rebound in exports as the US economy continues to recover. Housing activity has moderated, but is expected to remain elevated. On the supply side, shortages of manufacturing inputs, transportation bottlenecks, and difficulties in matching jobs to workers are limiting the economy’s productive capacity. 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 in July.

 

The recent increase in CPI inflation was anticipated in July, but the main forces pushing up prices – higher energy prices and pandemic-related supply bottlenecks – now appear to be stronger and more persistent than expected. Core measures of inflation have also risen, but by less than the CPI. The Bank now expects CPI inflation to be elevated into next year, and ease back to around the 2 percent target by late 2022. 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.

 

The Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s projection, this happens sometime in the middle quarters of 2022. In light of the progress made in the economic recovery, the Governing Council has decided to end quantitative easing and keep its overall holdings of Government of Canada bonds roughly constant.

 

We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target.

 Source: Bank of Canada

From the TradersCommunity News Desk

One thought on “Bank of Canada Ends Bond Purchases Abruptly and Unexpectantly Sending Loonie Sharply Higher”

  1. TradersCom says:

    Bank of Canada’s Schembri: Assessing labor markets impact on inflation has become more difficult

    Assessing labor markets impact of inflation has become more difficult especially in periods of excess demand.
    More uncertainty exists around timing of one output gap will close and inflation will return sustainably to target
    there is uncertainty about level of maximum sustainable employment and relationship between labor market conditions and inflation
    understanding how high the level of employment can get without sparking inflation is crucial
    evidence suggests that the firmly anchored inflation expectations, the relationship between inflation and the output gap has weekend
    structural forces affecting Canadian labor market are likely causing the level of maximum sustainable employment to change making it harder to identify
    traditional tools to measure employment aren’t as useful as they once were: the bank is looking at new ways to measure spare capacity in the labor market
    has developed new tools to measure impact of Covid 19 pandemic on workers and employers
    despite recent spike in inflation medium-term inflation expectations have remained relatively well anchored
    considerable excess capacity remains in the labor market; rates of unemployment and underemployment remain elevated
    we expect pandemic shock will have some scarring affects; we could see skills of long-term unemployed workers the road and their attachment to labor market weaken.

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