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MNI: BOC Will Reinvest QE Assets At Least Until it Hikes Rates

Reinvestment phase will be CAD4b-CAD5b a month

Source: Bank of Canada

The Bank of Canada is looking to eventually scale back QE purchases to a pace of CAD4 billion to CAD5 billion a month to stabilize the size of its balance sheet against maturing assets, Governor Tiff Macklem said Thursday, and remain in a reinvestment mode at least until policy makers decide to raise the record low policy interest rate.

The central bank's current weekly pace of CAD2 billion should be scaled back as the economic rebound makes further progress, Macklem said in a speech, without giving a timeframe or a specific target for the balance sheet. Investors have been betting the BOC will taper QE to CAD1 billion a week at the next meeting in October.

"We are moving closer to a time when continuing to add stimulus through QE will no longer be necessary," Macklem said. "Adjusting the pace of bond purchases won't necessarily mean that we have changed our views about when we need to start raising the policy interest rate. These decisions are distinct."

"Eventually, when we need to reduce the amount of monetary stimulus, you can expect us to begin by raising our policy interest rate. What this all means is it is reasonable to expect that when we reach the reinvestment phase, we will remain there for a period of time, at least until we raise the policy interest rate," he said.

The BOC on Wednesday affirmed the benchmark interest rate will likely remain at 0.25% until the second half of next year, when policy makers say the economy will return to full output and inflation will sustainably hold at its 2% target. Macklem's speech again mostly overlooked the second-quarter GDP decline to focus on signs of growth coming over the rest of this year as the economy re-opens and more people are vaccinated against Covid.

"Many of the sectors hit hardest by the pandemic, including tourism and hospitality, finally saw the return of customers after a year and a half of lockdowns," Macklem said. "This is real progress, even if the recovery remains choppy and we are still living with the virus and uncertainty about its course."

"We continue to expect strong growth through the second half of this year," he said.

Changes to the QE policy will be "gradual and will proceed in measured steps," he said. "We are not there yet -- and that timing is a monetary policy decision that will depend on economic developments." Macklem also noted that scaling back QE will not only affect its purchases of federal bonds in the secondary market, but also at auctions of new securities.

"Our purchases during this period will not match the maturities rolling off one-for-one because the maturities are large and unevenly spaced. We will therefore adjust our purchases to match maturities over a longer period, so our purchases are not unduly volatile," he said.

The Governor also brushed off inflation that has been above the BOC's 1% to 3% target range for four straight months, something that has become a major issue in campaigning ahead of a Sept. 20 election. "We continue to expect that these factors pushing up inflation will be transitory, but their persistence and magnitude are uncertain and we will be monitoring them closely," he said.

While the BOC has no employment target, the Governor again stressed the job market is part of his deliberations. "Achieving full employment is essential to a complete recovery and sustainably achieving our 2% inflation target," he said.

MNI Ottawa Bureau | +1 613-314-9647 |
MNI Ottawa Bureau | +1 613-314-9647 |

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