Unchanged for Now, but Higher Interest Rates Likely on the Way

The Bank of Canada held firm on interest rates on Wednesday, although it did announce an end to its pandemic-related quantitative easing program – a development that may signal higher rates ahead.

The quantitative easing program, which involves the bank buying up large amounts of government bonds, was initially implemented to help further stimulate the Canadian economy as the onset of the pandemic forced widespread lockdowns. But with vaccines proving mostly effective and the global recovery progressing, the Bank said it is now moving into the reinvestment phase, during which it will purchase government bonds solely to replace maturing bonds.

Reuters reported that Bank of Canada Governor Tiff Macklem told reporters in Ottawa that rate hikes will be coming earlier than expected, potentially sometime between April and September 2022. With no movement today, the Bank’s key overnight lending rate remains at 0.25%, where it has been since the spring of 2020 when the pandemic began.

As part of the commentary that accompanied its rate decision, the Bank did acknowledge Canada’s rising inflation rate, noting the main forces pushing up prices – higher energy prices and pandemic-related supply bottlenecks – “now appear to be stronger and more persistent than expected.” The Bank said it now expects inflation to be elevated into next year, before easing back to around the 2% target by late 2022.

Statistics Canada reported last week the Canadian inflation rate increased 4.4% in September from a year earlier. It was the highest rate since February 2003, driven mostly by a sharp gain in gasoline prices.

Raising interest rates is one of the tools the Bank of Canada can use to try to force inflation lower.

Reflecting ideas of a future rate hike, the Canadian dollar was trading higher after the Bank’s announcement at over 81 cents US.

Source: DePutter Publishing Ltd.

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