As expected, the Bank of Canada took another step to normalize the emergency levels of stimulus, when it announced that it is tapering its bond purchases from C$3BN weekly to C$2BN, in what it hopes to telegraph is a sign of optimism about the speed of the recovery. Naturally, it kept the rate unchanged at 0.25%.
“The Bank is maintaining its extraordinary forward guidance on the path for the overnight rate. This is reinforced and supplemented by the Bank’s quantitative easing (QE) program, which is being adjusted to a target pace of $2 billion per week. This adjustment reflects continued progress towards recovery and the Bank’s increased confidence in the strength of the Canadian economic outlook,” the bank said in a statement, which while echoing the Fed in claiming that while "the factors pushing up inflation are transitory" their "persistence and magnitude are uncertain and will be monitored closely."
Looking ahead, the BOC is maintaining guidance that economic slack will be absorbed in the second half of 2022, suggesting a rate hike won’t occur until then. There remains significant surplus capacity in the economy. And while vaccine progress and easing lockdowns are encouraging, the spread of variants remains a risk.
“The Governing Council judges that the Canadian economy still has considerable excess capacity, and that the recovery continues to require extraordinary monetary policy support. 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 July projection, this happens sometime in the second half of 2022”
“The Bank’s QE program continues to reinforce this commitment and keep interest rates low across the yield curve. Decisions regarding further adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective."
In kneejerk response, the USD/CAD reacted to the expected tapering of asset purchase to CAD 2bln from CAD 3bln, and thus fell from 1.2460 to 1.2431 before reversing and testing 1.2510 to the upside.
Eslewhere, the front-end and belly of the Canadian curve rallied and outperforms following Bank of Canada policy announcement; 2-year yields were richer by 4bp on the day -- dropping as low as 0.46%. But further out the curve 10-year note futures rally to highs of the day, topping at 146.46 as 10-year yields drop from around 1.345% to 1.313% session low.
As Newssquawk summarizes, most of the statement was in-line/neutral without tilting hawkish as some had expected – with the 2021 GDP forecast also lowered, output gap left unchanged, and as the H2 2022 rate hike forecast was not brought forward.