The Bank of Canada has met the market’s aggressive expectations on rate increases, causing the Canadian dollar to firm up. The money markets were pricing in at least one rate hike in the first half of 2022 before this morning’s statement. Previously, the Bank had forecasted rate hikes to begin in the second half of 2022. Now, it has amended that to indicate a rate forecast “in the middle quarters” of 2022. Also, as had been mostly expected, the Bank of Canada is ending quantitative easing (QE). Asset purchases will continue, but from now on, the central bank will only purchase enough Government of Canada bonds to replace maturing bonds. That is, the Bank no longer believes that the Canadian economy requires extraordinary monetary stimulus associated with QE, even though it believes the economy needs very low rates for another couple of quarters. Finally, the bank has dropped the word “transitory” in describing inflation. The Canadian dollar had been trading at a two week low prior to the announcement on weaker oil prices. After the Bank of Canada announcement, the loonie regained just under a penny and it is again trading in the middle of the range of where it has been since mid October. USD to CAD is currently at 1.232 (CAD to USD is at 0.811). Attention will now turn to Tiff Macklem’s news conference later today as well as US quarterly GDP data expected to be released tomorrow morning.
