MNI STATE OF PLAY: BOC May Lead the Way on Stimulus Exit

Bank of Canada Governor Tiff Macklem said conditions may be right for raising a record low 0.25% interest rate in the second half of 2022, and further paring back of bond purchases before that, positioning the BOC as the first G7 central bank to map out a clear exit from pandemic stimulus.

"Any further adjustments of our quantitative easing program will reflect our assessment of the strength of the recovery and its durability," Macklem told reporters Wednesday after the BOC said it would reduce QE to a minimum CAD3 billion a week from CAD4 billion, and last year's original pace of CAD5 billion. The BOC will maintain the maturity profile of its purchases and further adjustments will be gradual, Macklem said.

The rate decision projected the economy could reach full output and sustain inflation at the BOC's 2% target sooner than the previous expectation it would take until 2023, citing broad strength in consumer spending, business investment and even exports amid a stronger Canadian dollar. Like other major central banks, the BOC boosted its near-term inflation forecast above 2% on a temporary jump in gasoline prices, and warned the pandemic still leaves major challenges to restarting businesses and hiring workers.

U.S. Federal Reserve Chair Jerome Powell has said it is far to soon to even begin discussing a taper of QE, and the ECB and BOJ are still also pushing ahead with asset purchases. The BOC may wind up active QE purchases by year-end and raise rates next year, ING's chief international economist James Knightley and FX Strategist Francesco Pesole wrote in a research note.

GROWTH RAISED TO 6.5%

"It will certainly put a bit more pressure on the Fed to explain why it's looking to leave it until 2024 before tightening policy given stronger growth, employment and fiscal stimulus in the US versus Canada," they wrote. RBC, CIBC and Desjardins also see a BOC rate hike late next year.

Governor Macklem stressed his rate guidance is "outcome based" not "calendar based," and that "there's nothing mechanical" about the decision. "We are looking for a complete recovery," he said, and the BOC will look at a broader set of indicators including in the labor market to make that judgement.

Before the meeting, sources had told MNI the BOC would taper to CAD3 billion and a hold on the record low 0.25% interest rate, though there was less certainty policy makers would advance the timeline for restoring full output. The BOC 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.

Macklem also said recent signs of a fresh housing boom, such as record new construction and a 32% annual price gain on existing homes, are being dealt with more by other regulators. Part of the price gains appear to be worrying signs of people buying while they still can, and another part appears to be a demand shift as people seek bigger homes to ride out the pandemic.