MNI POLICY: BOC Will Adjust QE as Recovery Gains, Holds Rate

The Bank of Canada maintained asset purchases of at least CAD4 billion a week and said QE will be adjusted as policy makers gain confidence in the economic rebound, while holding the 0.25% interest rate and reiterating slack in the economy means conditions for an increase won't be in place for two years.

"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 January projection, this does not happen until into 2023," policy makers led by Governor Tiff Macklem said in a statement.

"To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway," the BOC said. "As the Governing Council continues to gain confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required."

Some investors are betting the BOC will taper asset purchases to CAD3 billion in April when there's more evidence that vaccine rollouts will help the economy snap back in the second half of this year. Macklem told MNI in a Feb. 23 interview decisions on QE will be guided by his 2% inflation target, a lot of slack in the economy remains, and the strong dollar could be another headwind to growth.

The BOC on Wednesday also said it now expects an expansion in the first quarter, throwing out its January forecast that GDP would contract at a 2.5% annualized pace from January to March. Inflation will also rise temporarily to around 3% in the next few months before moderating, the central bank said, pointing to base effects and higher oil prices amid broader weakness in the economy.

"Despite the stronger near-term outlook, there is still considerable economic slack and a great deal of uncertainty about the evolution of the virus and the path of economic growth," the BOC said. "The labor market is a long way from recovery, with employment still well below pre-COVID levels."

Markets are signaling greater expectations of inflation and perhaps a tightening of QE, with Canada's dollar strengthening 6% over the last year and 10-year federal bond yields doubling to about 0.9% over the last two months.

All 15 economists surveyed by MNI predicted no rate change, and all nine who made a QE prediction said the pace of asset purchases would also be unchanged. The BOC already slowed QE in October from the original March pace of at least CAD5 billion a week, while also extending the maturity of assets purchased.

Tapering bets also rest on investor arguments the BOC must avoid buying up more than half of federal bonds, which could happen by year-end. Finance Minister Chrystia Freeland has yet to present a budget for a fiscal year that starts in April, meaning there's still no clarity on future debt auctions.