MNI POLICY: BOC Advances Rate-Hike Timeline and Tapers QE

The BOC on Wednesday scaled back weekly bond purchases to at least CAD3 billion from CAD4 billion and said it now sees the economy reaching full output and sustainable 2% inflation -- its prior conditions for a rate increase -- in the second half of 2022 instead of 2023. It continued to hold rates at 0.25%.

"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. Based on the Bank's latest projection, this is now expected to happen some time in the second half of 2022," Governor Tiff Macklem said in a statement Wednesday.

"The Bank is continuing its QE program to reinforce this commitment and keep interest rates low across the yield curve. Decisions regarding further adjustments to the pace of net purchases will be guided by Governing Council's ongoing assessment of the strength and durability of the recovery."

Wednesday's "adjustment to the amount of incremental stimulus being added each week reflects the progress made in the economic recovery," it added. The BOC said in its previous statement QE would remain "until the economic rebound is well underway."

Markets expected a taper to CAD3 billion and a hold on the record low 0.25% interest rate, though there was far less certainty policy makers would advance the timeline for restoring full output.

MORE OPTIMISTIC OUTLOOK

The BOC on Wednesday raised its 2021 growth forecast to 6.5% from 4%, which would be the fastest since 2007, saying the third wave of Covid-19 is "material but temporary" as vaccine rollouts foster greater confidence. Improvement is broad-based including consumer spending, fiscal stimulus, business investment and an improved foreign trade balance.

Stronger U.S. demand for Canadian exports and higher global commodity prices "are likely to substantially exceed the adverse impacts of the recent appreciation of the Canadian dollar" the BOC said.

The 2021 inflation forecast was also massively upgraded to 2.3% from the January projection of 1.6%, with the BOC noting it's a temporary boost from gasoline prices. Inflation rates in each of the next two years were also lifted 0.2pp to 1.9% and 2.3%.

Risks around consumer prices are "roughly balanced" the BOC said, dropping a January proviso that expressed "greater concern" for downside risks.

The BOC also signaled more inflation pressures by reducing its estimated output gap between GDP and full potential to a range of 2% to 3% from the prior 3.25% to 4.25%, adding that "considerable excess supply still exists." Still, rising investment will enhance the economy's potential in coming years, the BOC said.

Areas of caution including intense weakness in service industries and tough job losses among low-wage workers, damage that will take a while to heal, the BOC said. Employment will also likely drop again this month amid third wave Covid-19 restrictions.