Bank of Canada ends QE program, moves up timeline for rate hike
BoC Policy Monitor: Time for a hurray-up offence
By Taylor Schleich/Jocelyn Paquet/Warren Lovely
National Bank of Canada, Financial Markets
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There had been lots of uncertainty leading into this meeting with so much of the BoC’s policy toolkit and economic outlook up in the air. In the end, the Bank opted to unleash its hurry-up offense, hawkishly revising forward guidance on the policy rate and marching Canada ever closer to rate normalization in an attempt to beat back more pronounced inflation pressures.
With slack expected to be absorbed in “the middle quarters” of next year (i.e. between April and September), it appears that an April rate hike should be considered the new base case for an initial move on the policy rate. Had the Bank thought the third quarter was still the time for lift-off, a shift in forward guidance likely would not have materialized.
On QE, this program will be laid to rest in short order as the Bank shifts to the “reinvestment phase”. A Market Notice that followed provided details here but there was nothing here too jaw-dropping. Consistent with earlier guidance, the Bank will be buying $4-5 billion per month, with roughly two-thirds of total purchases coming in the secondary market. It remains unclear how long this phase will last, but we can safely say it will remain in place at least until policy rate lift-off.
Today’s policy stance marks a noted shift from recent Tiff Macklem communications. Earlier in the month, the Governor came across as more dismissive of above-target inflation. Moreover, he’d described both upside and downside risks to potential GDP, which to us read as a broadly balanced assessment and thus, wouldn’t warrant major revisions. In any case, the Bank has clearly distanced itself from its resolute, transitory inflation stance, instead opting to be a bit more proactive (or at least less patient) in addressing inflation risks.
As noted earlier, we think it’s appropriate to pull forward our expectation for an initial interest rate hike into April of 2022. We wouldn’t be surprised if that is followed in June by another hike, and we now see 100 basis points of total policy rate tightening in 2022 as a distinct possibility. But while earlier rates hikes appear likely (compared to prior guidance), we still don’t see the Bank moving as high, as quickly on overnight as some short-term markets are projecting.
Taylor Schleich, Jocelyn Paquet & Warren Lovely
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