The Bank of Canada took a major step in pulling back on the amount of stimulus it is providing to the economy on Wednesday by ending net new purchases through its quantitative easing program and moving up its forecast for when it could first raise the benchmark overnight interest rate from the current, ultralow level.
The central bank said robust economic growth in Canada has resumed after a spate of weakness during the spring, although it is still being held back by supply constraints. It said it would shift its quantitative easing program to what it refers to as a reinvestment phase, in which the central bank purchases only enough new bonds to replace those that are maturing.
“In light of the progress made in the economic recovery, the governing council has decided to end quantitative easing and keep its overall holdings of Government of Canada bonds roughly constant,” the bank said in a statement on Wednesday.
The bank left its benchmark overnight interest rate unchanged at 0.25%, as expected. Its latest forecast indicates the key rate will likely remain at that level until the second or third quarter of 2022, slightly earlier than previously anticipated. The earlier time frame is based on a shift in when the bank expects economic slack to be absorbed so that its 2% inflation target can be sustainably achieved.
The Canadian economy has picked up in recent months after a disappointing contraction in the second quarter. It posted a larger-than-anticipated jobs gain in September that brought the employment level back to its pre-pandemic level.
The central bank’s outlook, published on Wednesday, said it anticipates a strong rebound in the third quarter, although at a slower pace than it had forecast during the summer. The growth estimate for the July-to-September period was adjusted to 5.5% annualized, down from an earlier forecast of 7.3%.
The bank said it now expects consumer-price index inflation to stay elevated through the remainder of this year and into 2022, before easing back to around 2% by late next year, because of supply disruptions and higher energy prices. Inflation has risen in Canada and globally as strong consumer demand bumps up against supply bottlenecks and higher energy prices.
The Bank of Canada sets interest rates to reach and maintain inflation at the midpoint of a 1% to 3% range.