Bank of Canada will likely taper asset purchases
BENGALURU — The Bank of Canada will taper its asset purchase program 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 Bank of Canada 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 per cent 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 program again next quarter, to $2 billion per week from $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 Bank of Canada would raise its key interest rate by 25 basis points to 0.50 per cent 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 end2022, compared to seven of 25 previously.
While Canada’s annual inflation rate rose to 3.4 per cent 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 per cent of 14 economists in response to another question.
The Bank of Canada in April said it expected inflation to temporarily hit the top of its one to three per cent control range, before returning to around two per cent in the second half of the year, echoing the findings of a separate Reuters poll of economists.
“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 and 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 per cent of economists, or 14 of 16 respondents, said yes.