Canada has become the first G7 country to scale back the monetary policy support measures which were introduced around the world when the coronavirus pandemic first struck early last year.
The Bank of Canada cut its monthly bond-buying by a quarter on Wednesday and brought forward its projections for when it will meet its inflation target, citing a brightening economic outlook despite the “temporary” setback from an upsurge in Covid-19 infections.
The bank will reduce its net purchases of government debt by C$1bn per week to C$3bn, it said. The adjustment “reflects the progress made in the economic recovery”, it said in a statement.
The bank revised up its projections for output growth this year by 2.5 percentage points from its January estimates, to 6.5 per cent.
It also changed its projection for when it will sustainably meet its inflation target to the second half of 2022, from 2023 in January’s forecast, bringing forward the earliest date at which it could raise interest rates.
“The outlook has improved for both the global and Canadian economies. Activity has proven more resilient than expected in the face of the Covid-19 pandemic, and the rollout of vaccines is progressing,” the policy statement said.
Tiff Macklem, Bank of Canada governor, said after the announcement that the cut to bond-buying reflected economic progress that had already occurred. He stressed that the bank’s forward guidance on the timing of future interest rate increases was “outcomes-based” and that there was “considerable uncertainty” around its forecast.
“We’re not going to count our chickens before they hatch,” he said.
Canadian government bonds weakened after the announcement, with yields on 10-year debt rising 0.04 percentage points to 1.54 per cent. The Canadian dollar strengthened as much as 1 per cent against the US dollar to the highest level since mid-March.
Central bankers in other major economies have signalled that they plan to maintain their economic support until the recovery has gathered more steam. The European Central Bank stepped up its bond-buying last month in a bid to push back against what it called a “premature” rise in borrowing costs.
The Bank of Canada’s move came despite an upsurge in Covid-19 cases which Justin Trudeau, prime minister, has described as “incredibly serious”, and which forced much of the country to reimpose tight lockdown measures.
The bank’s decision surprised some analysts, who had not expected a change in the earliest timing for rate increases.
“This is clearly the beginning of an exit strategy,” said Carlos Capistran, head of Canada and Mexico economics at Bank of America. “It is difficult to understand. The [US Federal Reserve] is not there. Other central banks are not there. Covid cases are increasing significantly [in Canada].”
“The goal from the Bank of Canada is to avoid finding out where the [quantitative easing] ceiling is,” said Frances Donald, chief economist at Manulife Financial.
The Canadian central bank owns more than 30 per cent of Canadian federal debt, having bought nearly 80 per cent of the bonds issued in the past fiscal year, according to figures collected by Manulife Financial.
On Monday, Trudeau’s government set out a budget with C$101bn (US$80bn) of spending over three years. Chrystia Freeland, finance minister, vowed to “punch our way out of the Covid recession”.