Bank of Canada to taper asset purchases again next quarter

The Bank of Canada will taper its asset purchase programme again next quarter and raise interest rates earlier than previously predicted amid expectations for a robust economic recovery after a recent downturn, a Reuters poll showed.

In April the BoC became the first among Group of Seven central banks to reduce the scope of its pandemic support although preliminary data showed the Canadian economy likely contracted 0.8% that month, its first decline in a year, largely due to coronavirus lockdown restrictions.

Canadian policymakers were forecast to keep monetary policy unchanged at the June 9 meeting, according to all 31 economists in the May 28-June 2 poll.

Sixteen of 17 economists who responded to an additional question said the central bank would taper its asset purchase programme again next quarter, to C$2 billion ($1.7 billion) per week from C$3 billion per week currently. One predicted it for October.

“We continue to expect the Bank to cut its purchases at every other meeting, meaning that it will trim them to C$2 bln per week in July and to C$1 bln per week in October,” noted Stephen Brown, senior Canada economist at Capital Economics.

“As the (economic) weakness in the second quarter was caused by the coronavirus restrictions, there is now scope for a stronger rebound in the third quarter as those restrictions are eased, and we continue to expect GDP to return to its pre-pandemic level by August or September.”

The poll consensus showed the BoC would raise its key interest rate by 25 basis points to 0.50% in Q4 next year, compared to no change predicted through to the end of 2022 in a poll taken just before the April meeting.

Fifteen of 22 economists in the latest survey expected at least one rate hike by end-2022, compared to seven of 25 previously.

While Canada‘s annual inflation rate rose to 3.4% in April, its fastest pace in a decade, that increase in price pressures was not expected to be sustained this year, according to over 70% of 14 economists in response to another question.

The BoC in April said it expected inflation to temporarily hit the top of its 1%-to-3% control range, before returning to around 2% in the second half of the year, echoing the findings of a separate Reuters poll of economists. [ECILT/CA]

“Next year is a long time away from now. At this point we are more focused on tapering and the timeline around that. Expectations are that inflation remains transitory, but that is not necessarily the case,” said Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital markets.

“Even if it is transitory over a multi-year period, maybe it will last a little bit longer and make central bank officials a little bit less comfortable keeping policy as easy as it is.”

Asked if the Canadian central bank was likely to raise interest rates before the U.S. Federal Reserve, about 90% of economists, or 14 of 16 respondents, said yes.

“The BoC has already laid out a roadmap for a H2 2022 rate hike whereas the Fed is still sticking to the 2024 time frame,” said James Knightley, chief international economist at ING.

“While I doubt the Fed will leave it that late, I suspect the supply strains in Canada are more intense than they are in the U.S., with (Canadian) employment already having nearly returned to pre-pandemic levels.”

(For other stories from the Reuters global long-term economic outlook polls package:)

($1 = 1.2077 Canadian dollars)

(Reporting by Mumal Rathore and Shrutee Sarkar; Polling by Sujith Pai; Editing by Rahul Karunakar and Richard Chang)