The Bank of Canada officially ended its bond-buying stimulus program and announced that it is moving up the timing of future interest rate increases amid worries of persistently high inflation.
In a statement, the central bank announced that it will stop growing holdings of Canadian government bonds, ending a quantitative easing program that has poured hundreds of billions into the financial system since the start of the pandemic in March 2020.
The Bank of Canada also signaled that it could be ready to raise interest rates as early as April of next year (2022), as supply constraints limit the economy’s ability to grow without continuing to fuel inflation.
The Canadian dollar soared on the latest news from the central bank, with the loonie jumping to $1.2321 per U.S. dollar, up more than 0.5%. Two-year benchmark yields rose about 20 basis points to 1.065 per cent.
Bank of Canada Governor Tiff Macklem maintained his pledge not to raise the benchmark overnight interest rate until the recovery is complete, but said he now believes that will happen in the "middle quarters" of 2022, rather than the second half of next year as previously thought.
Economists are anticipating that the Canadian central bank will start raising interest rates within the next six months, with markets pricing in four rate hikes in 2022.
The Bank of Canada has been using two tools to keep borrowing costs low: maintaining its policy interest rate near zero and buying up Canadian government bonds from investors to keep longer-term borrowing costs in check.
The central bank left its benchmark interest rate unchanged at 0.25% and has increased its bond holdings by about $350 billion since the start of the pandemic.
The buildup of inflationary pressures appears to be testing the Bank of Canada. The Bank of Canada also revised higher its forecasts for inflation to 3.4% in both 2021 and 2022. That’s higher than the target 2% inflation rate the central bank typically targets.