Canada

Bank of Canada May Delay Quantitative Ease Taper, Market Doubts Rate Hikes: RBC

The Canadian economy still has a long way to go before it’s recovered — possibly further than thought. RBC economist Josh Nye said today’s Bank of Canada (BoC) rate decision was widely expected. The central bank made no changes, reiterating the importance of quantitative ease (QE). Canada’s largest bank sees a risk of QE tapering later than previously thought. Combined with the market pricing in less than two rate hikes next year, easy credit will stick around. At least that’s the risk scenario rapidly forming as the recovery slows.

Bank of Canada Holds Rates, No Changes To QE

The BoC held the overnight rate at its current level, as widely expected. The 0.25 percent overnight rate adopted during the pandemic will stick for now. Since the meeting isn’t a major one, like those with monetary policy reports (MPR), not much was expected. These mini-meetings are mostly to reiterate to the market they’re sticking to the path.

The central bank isn’t just comfortable with a low rate environment, they want it lower. “This [the overnight rate] is reinforced and supplemented by the Bank’s quantitative easing (QE) program, which is being maintained at a target pace of $2 billion per week,” said the BoC this morning. 

Quantitative Ease Lowers Borrowing Costs When Rates Are Close To Zero

Quantitative ease (QE) is an unconventional monetary policy tool used to stimulate inflation. When interest rates approach the zero bound, the central bank tries QE. The program involves the central bank buying government bonds at a competitive rate. By pushing bond prices higher, yields fall. Since credit is competitive, this results in other yields falling as well. This trickles to consumers, who get low interest rate loans. 

By flooding the market with cheap credit, they want consumers to borrow. A lot. As much as they can, to be perfectly honest. The goal is to get more consumers competing for the same goods, driving inflation higher.

It’s not exactly a free lunch for stimulating inflation. One issue is the distortion of housing, resulting from cheap mortgage debt. Not exactly a surprise, since the tool is typically used after housing crashes, not before.

The BoC has said, while QE is a great tool, they admit it causes greater inequality. It’s just inequality though, so they aren’t going to slow it down or anything. More socially conscious central banks use this tool sparingly. New Zealand, for example, canceled its QE program a year ahead of schedule.

Risk of The Bank of Canada Not Tapering QE Soon Is Rising

Experts expect QE to taper soon, but RBC sees a risk of delay materializing. “We continue to see risk that the BoC delays its next QE tapering step (to $1B per week from $2B currently) beyond October,” said Nye to clients. 

Adding, “there is plenty of data between now and then to help the Governing Council judge the ‘strength and durability’ of the recovery but the onus is clearly on economic indicators improving.” 

That’s one for team Excessively Easy mortgage debt.

Remember, this isn’t just low rates. They’re flooding the system with credit to push the cost of goods higher. Delaying a taper would mean adding billions more in credit stimulus for longer.

Canada’s Economy Isn’t Strong Enough For Two Full Rate Hikes

Nye adds, the risk of the recovery dragging into the second half of next year is also real. Most forecasts have Canada mostly recovered in the first half of next year. With worse data points these days, this has shaken trader confidence. He estimates the market is pricing in less than two rate hikes in 2022 now. Not even two full hikes at this point, rough.

What does that mean for Canada’s bizarro real estate market? The weak economic environment is in favor of easy credit. We aren’t expected to see even a hint of higher rates until the end of October now. A weak economy is usually bad news for real estate, but not in the pandemic’s credit bubble. Investors find the low rates characteristic of a crisis to be comforting, apparently.

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5 Comments

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  • Ron 1 week ago

    Screw you savers! Bank of Canada don’t like you.

  • Brandon 1 week ago

    The 3M CDOR implied rate disagrees with RBC.

    “Given the June 2023 BAX contract with the current price of $98.685, there is a 46% chance that the 3M CDOR rate moves by 100 basis points by the time we reach the contract expiry”

    https://m-x.ca/marc_terme_bax_rate_expectations_en.php

    Two rate increases by the end of next year is a near-certainty, with three being possible.

    By mid-2024 125bps higher than today (150bps) looks likely.

  • Smug Canadians 1 week ago

    So stupid and irresponsible, yet not surprising since we basically follow what the US does (2008 aside)! If they keep rates low and we really have a recession fall upon us 2 or 3 yrs down the road, how do you implement QE??? No downward room!

    • alex 1 week ago

      QE is becoming rather ineffective at instigating economic growth as it is in Canada. Canadian economy has been shrinking these past few months, and I will postulate and say that the contributing factors causing this is lack of effective use of capital (i.e all that money went to making homes more expensive as opposed to spurring business activities) and inflation eroding purchasing power.

      It really is a culture issue with Canadians, mind you it was reinforced by negligent government. A significant amount of herd mentality and firmly held belief that real estate never drops nor does it experience volatility. Why invest or direct capital toward anything else?

      I would say the past 10 years really underlines the importance of allowing an efficient market.

  • Cto 7 days ago

    I have a premonition…
    In a year or two central banks will be searching long and hard to find another “crisis”., interst rates will remain at 0 and asset prices continue to skyrocket.

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