Rates “have yet to rise”. The balance sheet has already shrunk by 14%, more withdrawals to come.
By Wolf Richter for WOLF STREET.
The Bank of Canada today raised its policy rate and policy rate by 25 basis points each, to 0.50%. He cited 5.1% CPI inflation which he expects to rise further and faces one of the world’s worst housing bubbles – both fueled in part by two years of interest rate crackdowns. interest and money printing. He cited “further pressures on real estate prices” and additional inflationary pressures from commodity markets following Russia’s invasion of Ukraine.
“Interest rates will have to rise further,” the BoC said in the statement, in line with the jaws of BoC officials after the previous meeting in January.
“Price rises have become more pervasive and core inflation measures have all gone up,” he said. “All in all, inflation should now be higher in the near term than expected in January.”
“Persistently high inflation increases the risk that longer-term inflation expectations could drift upwards,” the Bank of Canada said.
“The Bank will use its monetary policy tools to bring inflation back to the 2% target and keep inflation expectations well anchored,” she said, after not even trying to do so for over a year and having been billions of miles behind the curve. .
Quantitative tightening (QT) for the BoC refers to the reduction of its holdings of Government of Canada (GC) bonds. He confirmed today that QT is in the planning stages but did not provide any details on the start date and shrink quantities.
The BoC has already unloaded essentially all Canadian Treasury bills (purple line) and almost all repos (green line). Its Government of Canada bond balance has been roughly flat since October of last year:
All combined assets on the BoC’s balance sheet, at C$494 billion, were down 14.1% from the March 2021 peak when the BoC began unwinding some of its stimulus, citing the “moral hazard” as one of the reasons:
To keep its holdings of Government of Canada bonds roughly stable, the Bank of Canada reinvests the proceeds of maturing securities to purchase new securities. When QT begins, it will allow Government of Canada bonds to mature and exit the balance sheet without reinvestment. QT “would complement policy interest rate increases,” the BoC said.
“The timing and pace of further policy rate increases, and the start of the QT, will be guided by the Bank’s continued assessment of the economy and its commitment to achieving the 2% inflation target,” he said. he declared.
BoC Governor Tiff Macklem will deliver a speech tomorrow and may choose to flesh out his thoughts on the upcoming QT.
The Bank of Canada considers the Canadian economy “very strong” and cited fourth quarter GDP growth of 6.7%. He said “the economic downturn has been absorbed”. He acknowledged that in January, Omicron had inflicted a “setback” on the labor market, but that in February things were already recovering. “Overall, first-quarter growth now looks stronger than expected,” he said.
This sets the stage for another rate hike at the next meeting on April 13 and for more rate hikes this year.
The BoC seems to be trying to get ahead of the Fed, as it did with the end of QE and the rise in takeoff rates. The Fed is on track to raise key rates on March 16, confirmed by Powell before Congress today. While the BoC and Powell cite the fallout from Russia’s invasion of Ukraine as a new source of ‘uncertainty’, they both said the resulting commodity price spikes are fueling inflation. already hot – and for both the BoC and Powell, controlling this inflation is now a top priority.
Canada has now joined a host of countries that have implemented rate hikes, including advanced economies, and including shocking and awe-inspiring rate hikes, and including the mother of all rate hikes by the Central Bank of Russia on Monday in addition to eight major rate hikes by then. Next in line to join the club is the Fed which has been trying too little too late to mitigate the effects of policy error after policy error since March 2020.
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