–BOC Keeps Reinvesting in Government Bonds on Its Balance Sheet
–BOC: Russia’s Invasion of Ukraine ‘A Major New Source of Uncertainty’
–BOC: Expect Further Rate Hikes As Economic Growth, Inflation Pressures Continue
–BOC: To Consider Start of Quantitative Tightening Based on Economic Assessment
By Max Sato
(MaceNews) – The Bank of Canada on Wednesday raised its policy rate – the target for overnight lending rates – to 0.50% from its record low 0.25%, to keep high inflation from hurting economic growth, but decided to maintain the level of assets on its balance sheet by reinvesting in government bonds amid uncertainty caused by the Ukraine situation.
The bank’s first interest rate hike since October 2018 is aimed at cooling Canada’s decades-high inflation rate and hot housing market by gradually removing extra monetary support that is no longer needed for a steady recovery from the pandemic-caused economic slump.
The bank said it is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds on its balance sheet roughly constant “until such time as it becomes appropriate to allow the size of its balance sheet to decline.”
Ukraine Invasion ‘Major New Source of Uncertainty’
The bank warned that Russia’s invasion of Ukraine is “a major new source of uncertainty” as the situation remains fluid, saying “we are following events closely.”
Energy and other commodities prices have risen sharply, adding to global inflation, and “negative impacts on confidence and new supply disruptions could weigh on global growth,” the BOC said, adding that financial market volatility has increased.
More Rate Hikes Expected, BOC To Mull QT
Looking ahead, the Governing Council “expects interest rates will need to rise further” as Canada’s economy continues to expand and inflation pressures remain elevated.
The bank’s next interest rate announcement is due on April 13.
“The Governing Council will also be considering when to end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink,” the bank said.
As the bank allows its balance sheet to shrink — the process called “quantitative tightening (QT)” — it would complement increases in the policy interest rate, it said. “The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target,” it added.
To defend the economy from the first wave of the pandemic, the BOC conducted three rate cuts totaling 150 basis points in March 2020, lowering the policy rate to .25% from 1.75%, a level maintained for more than a year since it was raised from 1.50% on Oct. 24, 2018.
As an emergency measure, the bank began buying government debt in March 2020 to provide liquidity and ease market strains, but in July that year, it formally called the program “quantitative easing (QE),” using the tool to support the economy by keeping market interest rates low.
Strong Q4 GDP, Q1 Also Seen Solid
Data released Tuesday showed that Canada’s gross domestic product grew at an annualized rate of 6.7% in the final quarter of 2021, coming in stronger than the bank’s projection, and “confirms its view that economic slack has been absorbed.”
Despite what is seen as a temporary setback in labor market improvement in January due to a spike in Covid cases, the BOC judged that “the rebound from Omicron now appears to be well in train,” noting resilient household spending.
“Overall, first-quarter growth is now looking more solid than previously projected,” it said.
Inflation’s Upside Risk
The bank noted that Canada’s annual consumer inflation continued accelerating in January to 5.1%, and remains well above the bank’s target range of 1% to 3%.
“Price increases have become more pervasive, and measures of core inflation have all risen,” it said. “The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities.”
The BOC now expects inflation to be higher in the near term than projected in January.
“Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards,” it said, adding it will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored.
Stage for Rate Hike Set in January
In its last policy decision on Jan. 26, the bank ended its “forward guidance” on holding rates steady until the economic slack is absorbed as it estimated Canada’s supply and demand balance was largely balanced, thus paving the way for a rate increase.
Governor Tiff Macklem has said Canadian interest rates are “on a rising path,” which means “multiple” rate hikes are expected.
He will deliver the economic progress report at 1130 EST on Thursday.