TORONTO (Reuters) - The Bank of Canada held its key overnight interest rate at 0.25% as expected on Wednesday and said it was ending its quantitative easing program, while signaling a rate hike might now come earlier next year than previously expected.
MARKET REACTION: CAD/
DOUG PORTER, CHIEF ECONOMIST, BMO CAPITAL MARKETS
"They (Bank of Canada) obviously think the conditions for quantitative easing are no longer there. So that's perhaps a little bit more aggressive than what the market was expecting. Their inflation forecast for next year has shifted very abruptly and is now basically in line with us - looking at an average inflation rate of more than 3% for next year."
"They also see the output gap closing by around the middle of 2022, which is a little bit earlier than what they had expected before. It reinforces the view that the bank is likely looking at somewhat earlier rate hikes. We now expect them to start raising rates in July of next year, and we would look for hikes of a quarter point per calendar quarter."
"A lot of it just goes back to the many supply issues that the world is facing...the rise in demand that we're seeing just can't be met by the existing level of supply. We've got a fundamental mismatch, and so what it means is spending pressures have been channeled more into price increases instead of growth. And so real growth forecasts have been trimmed, but inflation forecasts have been raised. For the Bank of Canada, that's an uncomfortable place to be. But the reality is they're an inflation targeting central bank, and so they've got to adjust policy to where inflation is, not necessarily where growth is.
"There's really no need for an ultra-stimulative monetary policy at this point."
SIMON HARVEY, FX MARKET ANALYST, MONEX EUROPE AND MONEX CANADA
"The fact that they have brought it (closing of the output gap) forward to the middle quarters of 2022 reflects the labor market dynamics and the higher inflation and the bank is becoming more and more sensitive to the inflation overshoot. That is why you are seeing the loonie grind higher."
ANDREW KELVIN, CHIEF CANADA STRATEGIST, TD SECURITIES
"It's a bit of a hawkish surprise, not so much the quantitative easing, more the change in forward guidance talking about how they expect the slack to be absorbed in the middle two quarters of 2022, rather than the second half."
(Reporting by Nia Williams, Fergal Smith and Steve Scherer; Editing by Denny Thomas)