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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