MNI: BOC Ends New QE Buys, Maintains Stock; Tweaks Guidance

The Bank of Canada on Wednesday brought forward its guidance for raising its record low 0.25% interest rate to the "middle quarters of 2022" from the second half, citing persistent inflation pressure and less slack in the economy, while announcing new bond buying has ended but that the Bank was moving to a reinvestment phase, replacing maturing bonds to maintain the stock of QE.

"We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank's projection, this happens sometime in the middle quarters of 2022," the Governing Council said in a statement accompanying the decision.

Given the economic recovery, policymakers decided "to end quantitative easing and keep its overall holdings of Government of Canada bonds roughly constant," the statement said. The Bank will release bond purchase details at 10:30 EST, as it moves to exit from the prior pace of CAD2 billion a week.

INFLATION AT TARGET H2 2022

Inflation will slow to around the 2% target by "late 2022" and the output gap will close in the middle quarters of next year, the BOC said in the rate decision and an economic forecast paper.

"The main forces pushing up prices – higher energy prices and pandemic-related supply bottlenecks – now appear to be stronger and more persistent than expected," the Bank said while raising the 2022 CPI forecast to 3.4% from 2.4%. "The Bank is closely watching inflation expectations and labour costs to ensure that the temporary forces pushing up prices do not become embedded in ongoing inflation."

"The Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable monetary policy support," with this year's GDP forecast reduced to 5.1% from 6% and 2022 to 4.3% from 4.6%. Governor Tiff Macklem is balancing inflation running outside his 1%-3% target band for six months with GDP that shrank in the second quarter.

Economists expected no rate change, a reduction in QE to a pace that stabilizes the balance sheet at around CAD500 billion, with some saying the BOC would announce the reinvestment phase. Bond markets earlier this week indicated that Canada will see an increase in rates before the second half of next year, with one measure fully pricing in a move by March.

The Bank cited production bottlenecks as adding to inflation pressures and curbing supply more than GDP, leaving the output gap narrower than prior estimates. Inflation is expected to average 4.8% this quarter, 2.1% in the fourth quarter of next year and 2.5% in Q4 2023.