MNI STATE OF PLAY: Canada Puts April Rate Hike On The Horizon

The Bank of Canada on Wednesday said the economic rebound is strong enough to stop quantitative easing and conditions for lifting the record low 0.25% interest rate could be in place as soon as April, while pledging to keep faster-than-expected inflation under control.

"The Bank of Canada is committed to ensuring that price increases don't become ongoing inflation," Governor Tiff Macklem said at his first in-person press conference since the pandemic shutdown. The Bank will continue to adjust its policy settings if more inflation pressures emerge, he told reporters.

Trading in bankers' acceptance contracts after the decision priced 50bps of rate hikes by March versus 25bps beforehand, and 100bps by June. Those bets are far ahead of a group of economists who see the first move in July or later, reflecting weakness in the job market and GDP that shrank in the second quarter.

The pace of bond purchases will slow from CAD2 billion a week to CAD4 billion-CAD5 billion a month, and Macklem reiterated the "reinvestment" phase will last at least until there is a rate increase. The pace is subject to change and purchases will seek to match maturing assets over time rather than on a day-to-day basis.

LESS ECONOMIC SLACK

The bond purchases were "very effective" as part of a broader strategy, Macklem said in response to a question from MNI about the CAD500 billion balance sheet. Staff economists recently said QE lowered yields by 10bps.

"An April start to tightening looks increasingly likely as long as we see continued progress in the economic and labour market recovery over the next six months," RBC economist Josh Nye wrote in a research note.

The Bank's trigger for a rate increase is inflation stable around its 2% target and an economy at full output, forecasting the price goal will be met late next year and the output goal in the "middle quarters" of next year.

The Bank made several references to inflation being stronger than expected, and noted supply bottlenecks have shrunk the amount of slack in the economy. The job market is also taking longer to heal as firms and workers have trouble matching up needed skills, the BOC said.