Canada

Bank of Canada Tapers Quantitative Ease By 25%, Rate Hikes May Come In 2022

The Canadian economy’s recovery is well underway, and that means easy money may be on the way out. Bank of Canada (BoC) updated its outlook earlier today. The central bank said the accelerated recovery will allow them to ease stimulus. To start, they’ll taper quantitative ease (QE), and speed up the end of their commitment to low rates.

Higher Interest Rates May Arrive As Early As Next Year

Higher interest rates might be here a lot more quickly than many were hoping. The BoC will commit to holding the policy interest rate at the lower bound until the slack is absorbed. It will be considered absorbed when inflation sustainably hits a 2 percent target. They see it rising much higher in the near-term, but consider it a base effect. That’s when the previous year has an unusual movement, that amplifies current growth. They anticipate this will happen in the second half of 2022, which is a full year sooner than expected.

Quantitative Ease To Taper By 25%

Everyone knew quantitative ease (QE) was going to taper, but they made it official today. The BoC is tapering weekly QE bond purchases to $3 billion per week, down 25% from today’s amount. It goes into effect by April 26, 2021. The drop was expected for technical reasons, at the very least. That’s another way of saying the government slowed on spending, so as much wasn’t needed. 

The QE buying is still substantial, but so is the amount of tapering. The program helps push rates to artificially low levels, distorting adjacent markets. The program is under fire by housing activists, who are attempting to regulate future use. By tapering QE, yields would be allowed to rise to more natural levels. As they rise, so should the cost of longer-term borrowing.

Economic Growth Is Much Higher Than The BoC Anticipated

Back to the economic growth. The BoC is finding they were very wrong about the economy, and it’s recovering faster than they expected. Output growth is now forecast at 1.6 percent annually, up 0.5 percentage points from the October forecast. GDP is forecast to rise 6.5 percent in 2021, up from the 4.0 percent forecast in January. Both forecasts are upward revisions of almost a third from previous expectations. Things aren’t a little better. They’re a lot better.

The economy is doing much better than the BoC expected, which means the commitment to low rates will fade. It also means they pumped out much more stimulus than was needed. While there’s no set date on when rates will rise, the impact to credit markets may be seen a little more quickly. The taper of QE will cause similar lending terms to rise a little more.

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14 Comments

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  • Im Therious 1 year ago

    Imagine if the people who made these decisions had to suffer the consequences of their actions.

    But no, they get their gold-plated government pension and a chauffeur and security detail for life.

    They’ve delivered on a platter the artificial inflation of non-productive assets , inflation through the roof/devaluation of savings and people expecting and receiving more entitlements.

    Then as the inevitable crash happens, diligent tax payers pay the price, yet again, bailing out the irresponsible and paying for that pension.

  • Old Greg 1 year ago

    Translation… We printed so much money that inflation is running extremely high and to curb it we will have to raise interest rates, creating stagflation!

    • Enigmatic Lips 1 year ago

      “Translation… We printed so much money that inflation is running extremely high and to curb it we will have to raise interest rates, creating stagflation!”

      No. There’s too much private debt in the system. If the BoC raises rates too high, then Canadians will be forced into insolvency.

      • Chewy 1 year ago

        I’d rather Canadians who spent beyond their means, leveraged beyond their means, go insolvent. Short term pain > long term pain.

      • D 1 year ago

        Dog eat dog world. I don’t care about Canadians that over leveraged themselves when they couldn’t afford it. It’s time to let the market fix the inefficiencies set up by the central bank, commercial banks and federal government.

        • Enigmatic Lips 1 year ago

          “I don’t care about Canadians that over leveraged themselves when they couldn’t afford it. It’s time to let the market fix the inefficiencies set up by the central bank, commercial banks and federal government.”
          Defaults will just force the commercial banks into insolvency. As we saw in 2008, governments won’t let that happen.

          • Sam 1 year ago

            Isn’t there a nice big high rise empty office tower in Manhatten that once belonged to Lehman Brothers?

          • Enigmatic Lips 1 year ago

            “Isn’t there a nice big high rise empty office tower in Manhatten that once belonged to Lehman Brothers?’

            Sure. The US made an example out of Lehman Brothers but how much did they spend to save ALL THE OTHER BANKS. Up to USD $29 TRILLION.

            $29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient
            https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1970414

  • James Ling 1 year ago

    Rates won’t be moving anywhere until 2023/2024 earliest… the speech was a token gesture by the BoC to help calm real estate.

    • MisterAV 1 year ago

      Is that why commercial banks are saying it too?

      • James Ling 1 year ago

        Yes it is, they’re all trying to temper the real estate market right now by pushing the psychology aspect.

    • D 1 year ago

      Nope, 2022 is the year. Convid restrictions will be lifted and Canadians will spend to their hearts content and to avoid hyperinflation, rates will be hiked. Stocks, and real estate will plummet, those smart and with cash will be ahead when the fire sales start.

      • James Ling 1 year ago

        You’ve been saying this since what 2010? Raising rates before the US will decimate the export economy as we would see 1.20 USDCAD or worse.

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