Bank of Canada cuts back on bond-buying program; gives growth forecast a boost
The Bank of Canada (BoC) sees a brighter road ahead for the Canadian economy in the coming months. Citing significantly higher projections for growth, the bank moved forward its timing for an interest rate hike to 2022 from 2023. It has also scaled back on its government bond buying program, moving to a target of $3 billion per week from $4 billion as of Monday.
Rate hike moved forward
The Bank held its target for the overnight rate at 0.25%. It has also dramatically improved its outlook for the Canadian economy, forecasting 6.5% growth in 2021, up from 4% in January and moderating at around 3.75% in 2022 and 3.15% in 2023. It now projects a rate hike in the second half of 2022 as opposed to its earlier projection of 2023.
It's interesting to note that the BoC is the first of the G7 central banks to start tapering its asset purchase program and to move timing for an interest rate hike forward. Along with the upgrade in growth expectations, these decisions surely indicate the strength of the recovery being better than anticipated.
The case for growth
The BoC sees a major rebound in consumer consumption coming in the wake of the vaccine rollout and the subsequent reopening of the Canadian economy. It's also projecting global GDP growth of just over 6.75% in 2021, 4% in 2022 and nearly 3.5% in 2021.
South of the border, the Bank is eyeing a strong U.S. recovery fueled by fiscal stimulus and a rapid vaccination rollout. Rising commodity prices - including oil - have also given the Canadian dollar a lift.
Much, however, depends on the pandemic and the pace of vaccinations here in Canada as more contagious virus variants introduce “a new dimension of uncertainty." The impact of the pandemic and its associated lockdowns has been felt unevenly across sectors and Canadian workers. Indeed, the latest lockdowns are yet another setback particularly for low wage workers, young people and women. As a result, the Bank is now looking at a spectrum of indicators to help measure the health of the labour market.
The hot housing market is also flashing a warning light – the BoC is now monitoring risks associated with the sudden spike in house prices.
Despite the uncertainty, the Bank says Canadian businesses and households have shown themselves to be resilient throughout the pandemic as evidenced by strong employment and growth numbers in the first quarter of the year.
Despite the reduction, quantitative easing remains firmly in place as the bank waits for inflation to sustainably hit its 2% target, likely in the second half of 2022. In the meantime, the Bank forecasts a temporary spike in inflation (to the upper bound of the 1-to-3% range) over the next few months mainly due to the sharp drop in some goods and services at the start of the pandemic, including falling gas prices since December. The BoC remains committed to its quantitative easing program and to keeping interest rates low across the yield curve.
Positioned for growth
We've positioned our portfolios for equities to continue their recent outperformance relative to fixed income. The BoC's acknowledgement that both the domestic and global economies are now expected to grow at a faster pace than previously anticipated support this position.
We have positioned our fixed income exposure for a modest increase to bond yields and, with the Bank reducing its asset purchase program and signaling 2022 for higher interest rates, we are appropriately positioned to preserve capital.
If you have any questions or require more information, please contact your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.