Bank of Canada to raise key rate before reducing bond portfolio

The Bank of Canada said Thursday that it intends to raise interest rates before reducing the size of its government bond portfolio, although the timing of the rate hike will depend on the economic recovery.

The central bank is currently buying about $ 2 billion worth of bonds per week.

Bank of Canada Governor Tiff Macklem has indicated that the bank will eventually reach what it calls a reinvestment phase, which will allow it to adjust its program by reinvesting the proceeds of maturing bonds. During this phase, Macklem estimates bond purchases could average around $ 1 billion per week.

When the bank reaches this reinvestment phase, it expects to stay there at least until it raises its key interest rate. The bank has indicated that it will keep its policy rate at what it calls its “floor value” until the economy is strong enough, which it says will happen in the second half of 2022.

Economic recovery

“The moment when this phase will begin and the time it will last are monetary policy decisions. These decisions will depend on the strength of the recovery and the evolution of inflation, ”said Mr. Macklem in a speech to the Federation of Quebec Chambers of Commerce. “The governing board still expects the economy to strengthen in the second half of 2021. But the fourth wave of the pandemic and lingering supply-side problems could weigh on the recovery. “

Mr Macklem pointed out that the economy was showing good momentum as the third quarter of 2021 approached, but supply chain issues, rising COVID-19 cases and weak exports had led the Canadian economy to contract by about 1% in the second quarter. “On the other hand, consumption, business investment and public spending have contributed to growth. Total domestic demand actually grew by more than 3%, ”he said.

The governor estimated that there was still a lot of excess capacity in the Canadian economy, which is why the bank’s current key interest rate remains low.

The Bank of Canada’s key rate is currently 0.25%.

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