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.