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Bank of Canada ends quantitative easing, signals rate hikes could come sooner

Bank of Canada Governor Tiff Macklem takes part in an event at the Bank of Canada in Ottawa, Canada, October 7, 2021. REUTERS/Blair Gable
Bank of Canada Governor Tiff Macklem takes part in an event at the Bank of Canada in Ottawa, Canada, October 7, 2021. REUTERS/Blair Gable (Blair Gable / reuters)

The Bank of Canada says it expects inflation to be higher than it originally thought and suggested an interest rate hike could come sooner than expected.

For now, Canada’s central bank kept its overnight rate at 0.25 per cent. It also ended its stimulus program called quantitative easing (QE). QE moves into a reinvestment phase, during which Government of Canada bonds will be bought only to replace maturing bonds.

The Bank of Canada says inflation appears to be less temporary than it originally thought.

“The main forces pushing up prices – higher energy prices and pandemic-related supply bottlenecks – now appear to be stronger and more persistent than expected,” said the Bank of Canada in a release.

“Core measures of inflation have also risen, but by less than the CPI. The Bank now expects CPI inflation to be elevated into next year, and ease back to around the 2 percent target by late 2022.”

Bank of Canada Governor Tiff Macklem reiterated inflation's temporary nature during a press conference following the announcement and tried to reassure Canadians concerned about higher prices.

"I want to assure Canadians that we can and we will keep inflation under control," said Macklem.

Higher interest rates

The Bank of Canada has also changed its view on the next interest rate hike. Although it says monetary policy support is still required, it moved up its projection for the next interest rate hike.

“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 projection, this happens sometime in the middle quarters of 2022,” said the Bank of Canada.

In its previous interest rate announcement, the Bank of Canada projected it would happen in the second half of 2022.

"Interest rates don't need to be as low for as long to get that full recovery and get inflation back," said Macklem.

The real GDP growth forecast was lowered a percentage point to 5.1 in 2021, and by 0.3 percent in 2022 to 4.3 per cent.

“Overall, much more hawkish than we expected (although not more hawkish than what the market has priced in), and in our view, overly pessimistic about the how much supply shocks will constraint potential GDP ahead, and a bit optimistic in its growth forecasts, both of which could delay the timing of the first hike versus what is signalled here,” said CIBC chief economist Avery Shenfeld.

The loonie and house prices

The loonie and bond yields jumped in the minutes following the announcement.

"As we go to pixels, the exchange rate is trading nearly 70 basis points higher, helping to correct a period in which the currency failed to keep pace with rising commodity prices," said Karl Schamotta, chief market strategist at Cambridge Global Payments.

The Bank of Canada says it expects the frenzied pace of house price growth to moderate.

"Housing market activity is anticipated to remain elevated over 2022 and 2023 after having moderated from recent record-high levels. Increased immigration, solid income levels and favourable financing conditions will support ongoing strength," said the Bank of Canada.

"New construction will add to the supply of houses and should help soften house price growth."

Also See: The latest real estate news for housing prices, mortgage rates, markets, luxury properties and more at Yahoo Finance Canada.

Low mortgage rates helped fuel the housing boom during the pandemic. And even though variable rates could be headed higher, CEO James Laird says variable still makes a lot of sense.

"While a fixed rate is the right choice for any risk-averse Canadians, households that can accommodate more risk should not rule out a variable rate. Even in this rising rate environment, there would need to be four to six Bank of Canada rate hikes before today's variable rate would be equal to today's fixed rate," said Laird.

"Consumers should expect fixed-rate increases this week and a steadily increasing fixed-rate environment between now and the end of 2022. Anyone shopping for a home who is interested in a fixed rate should get pre-approved right away so that they can hold today's rates for 120 days."

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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