BoC's move on housing will likely be regulatory not rates: BMO's Benjamin Reitzes
The Bank of Canada is signaling it will the first Group of Seven central bank to clearly start taking its foot off the gas as the nation’s economic recovery from the COVID-19 crisis accelerates.
Deputy Governor Toni Gravelle used a Tuesday speech to lay out ground rules the central bank will use to slow the pace of its purchases of Canadian government bonds. The quantitative easing program has been a key tool policy makers have used to keep market interest rates low since the pandemic hit a year ago.
The comments suggest a greater willingness than the Federal Reserve and other major central banks to scale back support for the economy. Analysts anticipate next steps to pare bond purchases will come as early as a policy decision next month, versus expectations for a so-called taper in the U.S. next year. The Bank of Japan last week tweaked its stimulus programs, but argued it’s not hitting reverse.
Gravelle’s speech “confirms our expectation that the Bank is ready to right size” its QE program, Ian Pollick, head of fixed income, currency and commodity research at Canadian Imperial Bank of Commerce, said by email.
Canada’s central bank has been buying a minimum of $4 billion (US$3.2 billion) in government bonds each week, accumulating more than $250 billion of the securities over the past year. That pace is likely no longer warranted with an outlook that appears to improving dramatically by the week, helped by a recovery in commodity prices and a robust housing market.
A bigger issue in Canada than elsewhere has been the growing share of the central bank’s holdings of the outstanding bond market. It currently owns a little more than 35 per cent of the total market of outstanding government of Canada debt. Governor Tiff Macklem has said that when holdings rise above 50 per cent, market functioning could get distorted.
What Bloomberg Economics Says..
“We expect the full transition to the pure reinvestment phase of purchases, implying a steady balance sheet, will take at least the remainder of 2021. We expect a rate hike only in early 2023, as we think the BoC will be more optimistic about the economy’s growth potential come April.”
-- Andrew Husby, economist
Pollick predicted the central bank will reduce weekly purchases to $3 billion at a policy decision on April 21. Another $1 billion per week taper is expected later this year.
Gravelle’s virtual remarks before the CFA Society Toronto highlighted how the reduction in purchases will work.
He said the tapering will be “gradual and in measured steps” and pointed out that moderating the pace of bond acquisitions will still mean stimulus is being added, as long as purchases exceed maturities. Policy makers will eventually bring net purchases to zero when the “recovery is well underway.” But even then, that will still leave a considerable amount of stimulus in place because of the stock of accumulated bonds.
“We will eventually get down to a pace of QE purchases that maintains -- but no longer increases -- the amount of stimulus being provided,” Gravelle said.
One concern is that this tapering ends up tightening financial conditions too quickly. Canada’s stronger economic outlook, and expected early exit from stimulus, have driven up government bond yields faster than their U.S. equivalents. Canada’s dollar, meanwhile, is the best performing major currency this year.
In his speech, Gravelle gave assurances the timing of any taper will be guided by the central bank’s economic outlook. Adjustments to the program are also distinct from any change to the policy interest rate, he added. The Bank of Canada has lowered its overnight rate to 0.25 per cent and pledged to keep it there until economic slack has been fully absorbed -- expected well after the QE program ends.
“It won’t necessarily mean that we have changed our views about when we will need to start raising the policy interest rate,” Gravelle said.