Quantitative Easing

Bank of Canada Ends Quantitative Easing; Increases forecast for possible rate increases – 2nd update

By Kim Mackrael and Paul Vieira

OTTAWA – The Bank of Canada has said it will end quantitative easing and may hike its overnight key rate earlier than expected, as policymakers try to dispel concerns about high inflation.

The move is among the most important steps taken by a major central bank in the developed world to withdraw the extraordinary stimulus that was extended during the Covid-19 pandemic. Some central banks in developing countries and smaller advanced economies have already started to raise interest rates.

Canada, along with the United Kingdom, leads the pack among the Group of Seven economies in reducing monetary and fiscal stimulus, in part due to improving economic conditions and fears about the economy. ‘high inflation. The Federal Reserve has indicated that it is ready to start scaling back its bond buying program in November.

In its latest policy decision, the Bank of Canada said the country’s robust economic growth had resumed after a wave of weakness in the spring, although it was still held back by supply constraints. She has said she will move her quantitative easing program to what she calls a reinvestment phase starting November 1, during which the bank will only buy enough new bonds to replace those that are due.

“We are getting closer to a full recovery,” Bank of Canada Governor Tiff Macklem said. “We don’t need QE anymore.”

Last week, Canada’s Finance Minister Chrystia Freeland said the Liberal government would end its pandemic-triggered emergency income benefits, citing the progress made to date in the economic recovery, including the recovery of three million jobs lost at the start of the public health crisis.

The bank left its overnight key rate unchanged at 0.25%, as expected. Its latest forecast indicates that the policy rate will likely stay at that level until the second or third quarter of 2022, slightly earlier than expected. The previous timeline is based on a change in when the bank expects the economic downturn to be absorbed so that its 2% inflation target can be reached on a sustainable basis.

Mr Macklem said that means the central bank will consider raising interest rates sooner than it previously thought. “Interest rates don’t have to be this low for that long to get this full recovery,” he said.

The central bank said supply constraints that have impacted the global economy are limiting Canada’s production capacity and, to a lesser extent, holding back economic growth. This has led to a smaller gap between potential output and economic growth, increasing the period during which the economy is expected to operate at its potential.

Supply constraints have also contributed to heightened concerns about inflation. The bank said it now expects consumer price index inflation to remain high through the end of the year and into 2022, before falling back to around 2%. by the end of next year. Inflation has risen sharply in Canada and around the world, as strong consumer demand collides with supply bottlenecks and rising energy prices.

Mr Macklem said the central bank would not let price hikes get out of hand. “We can and will keep inflation under control,” he said. “Our job is to ensure that the price increases that we have seen for many products marketed around the world are not passed on and do not result in continued inflation.”

The Bank of Canada sets interest rates to meet and keep inflation at the midpoint of a range of 1% to 3%.

BMO Capital Markets chief economist Doug Porter said he now expects the central bank to start raising interest rates in mid-2022 and continue to raise interest rates quarterly. until the end of 2023. faster pace, he said, given concerns about how inflation will develop over the next six months.

The Canadian economy has rebounded in recent months after an unexpected contraction in the second quarter. It posted a larger-than-expected job gain in September, which brought the level of employment back to its pre-pandemic level.

The central bank’s economic outlook, released on Wednesday, indicates that it anticipates a strong rebound in the third quarter, albeit at a slower pace than expected over the summer. The growth estimate for the July-September period has been adjusted to 5.5% on an annualized basis, down from an earlier forecast of 7.3%.

Write to Kim Mackrael at [email protected] and to Paul Vieira at [email protected]

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