Bank of Canada ends QE and moves up timeline for interest rate hikes

BNN Bloomberg | Theophilos Argitis | Oct 27, 2021

The Bank of Canada ended its bond-buying stimulus program and accelerated the potential timing of future interest rate increases amid worries that supply disruptions are driving up inflation.

In a statement on Wednesday, policy makers led by Governor Tiff Macklem announced they would stop growing holdings of Canadian government bonds, ending a quantitative easing program that has poured hundreds of billions into the financial system since the start of the COVID-19 pandemic.

They also signaled they could be ready to hike borrowing costs as early as April, as supply constraints limit the economy’s ability to grow without fueling inflation.

The Canadian dollar soared and bonds were hit hard. The loonie jumped to $1.2321 per U.S. dollar as of 10:39 a.m., up more than 0.5 per cent. Two-year benchmark yields rose about 20 basis points to 1.065 per cent

Macklem maintained his pledge not to raise the benchmark overnight policy rate until the recovery is complete, but officials now believe that will happen in the “middle quarters” of 2022, rather than the second half of next year as previously thought.

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The language will reinforce market expectations the Bank of Canada is poised to quickly pivot to a tightening cycle amid growing price pressures. Investors are anticipating the Canadian central bank will start raising interest rates within the next six months, with markets pricing in four rate hikes next year.

“Shortages of manufacturing inputs, transportation bottlenecks, and difficulties in matching jobs to workers are limiting the economy’s productive capacity,” policy makers said in the statement. “Although the impact and persistence of these supply factors are hard to quantify, the output gap is likely to be narrower than the bank had forecast.”

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