Canada’s central bank said they would “forcefully” control inflation last month. In the first rate announcement since that statement, the Bank of Canada (BoC) took the first steps of following through. To curb “excess demand,” the central bank raised rates aggressively and even set a date to begin reversing its QE program.
Canada’s Overnight Rate Just Doubled For The Second Time In 2 Months
The BoC executed its widely expected “super” rate hike today. The overnight rate climbed 0.5 points to 1.0 percent, climbing at double the usual pace. The overnight rate is now four times higher than it was before March. However, it’s still 0.75 points lower than before the outbreak began. These are still very low and stimulus-era interest rates, even if some people think it’s outrageous.
The BoC is trying to bring CPI back to its 2-point target, but it keeps flying. The central bank raised its forecast for inflation to reach 6% in the first half of 2022 and remain well above the target for the rest of the year. By the second half of 2023, they expect annual CPI to fall to 2.5 percent and return to 2 percent by 2024. That means no target inflation for at least 2 years, and those revisions have been climbing.
Bank of Canada Announced A Date To Reverse QE
The central bank will finally begin reversing its quantitative ease (QE) purchases. During QE, the central bank bought Government of Canada debt in large quantities to bid up the cost, and drive yields lower. The program helped to create excess liquidity and stimulate higher inflation by driving demand for things like mortgages. Now the ease introduced into the economy needs to be reversed.
The central bank said they’ll begin to reverse the asset holdings using quantitative tightening (QT). Starting April 25th, they’ll let bonds mature and not replace the holdings on the BOC’s balance sheet. By doing this, they’ll gradually reduce credit liquidity.
The impact from QT depends on demand for credit. If all things are equal, a reduction in liquidity can increase the cost of borrowing further. In a typical rising interest rate scenario, the amount of borrowing tapers, and the reduction in liquidity has a minimal additional impact.
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Is there a way to see when these bonds will be maturing to get a better idea of when we can expect effects of the QT?
More smoke, mirrors and lies.
Interest will have to be above the rate of inflation in order to kill it and we all know that is not going to happen
Don’t worry, they’ll break something in the economy well before they get to positive real rates. Asset valuations are on the razor’s edge right now and set for rapid deflation.
Deflation no where in site right now. It’s inflation as far as the eye can see, it’s the only way they have of reducing the obnoxious debt (theft) they have created forever.
Anyone who bought a house in the late eighties and through the nineties knows exactly what’s already in the midst of happening. 30-40% price drop followed by a decade before getting back close to wherever they were. That’s really what happened, and it’s much worse this time. Read about it.
I had my first house for 8 years starting in 1991 and sold for 5% less in 1999, not even factoring inflation for inflation.
These rates are going to cripple the residential real estate sector here in Canada as well as the Banks. With high interest rates comes high insolvency as the reason for supply issues has nothing to do with limited number of homes and everything to do with hoarding by Realtors, Bankers, Brokers, Politicians, etc.. Banks are going to be in dire need of help by the Government as well through bail outs on account that the banks here allowed people to essentially buy property no money down through HELOCS as most of these people pulled the equity out of their ever climbing real estate portfolio to buy 10, 20 or even 50+ homes. As rates go up home prices go down and since there hasn’t been a downward cycle for over 25 years the correction will most likely take three times longer than it should have had they allowed the cycle to reset every 10 years (most likely 7-9 years for home prices to bottom out if we’re lucky as the correction may last a lot longer).
Anyone who believes the BOC’s QT narrative needs to get out of ignorance.
They’re not tightening, they’re just easing less. There’s a difference.
The Central Bank Balance Sheet kept escalation throughout 2021 and currently stands at 502,945 CAD Million. It use to be about 140,000 CAD Million prior to 2020.
They will never tighten back to that. Ever IMHO.
Moreover, interest rates would have to climb much higher to keep inflation in check.
If they raise the bank rate too much, we’re going to go from inflation to deflation real fast.
A balance sheet roll off is by definition a tightening because the market has to absorb the additional credit facilities. I’m aware that credit markets are very boring, and therefore an area not many people choose to specialize in when they study finance, but explaining how it works when you may not have completely understood it, is a bad idea.
Other tightening measures people don’t realize have been rolled out include DSB reversals, removing over $300B in credit liquidity.
This is not taught in school because the powers that should NOT be do not want people to know and they are too lazy to continue their education after leaving so called school.
I can just see their eyes rolling over at the above comments if they even bother to read them.
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