BOC Tapers QE Program and Delivers Upbeat Economic Outlook

As we have expected, the BOC delivered a hawkish tapering of QE purchases in April. the weekly asset purchases will reduce to CAD3B/week, from CAD4B/week previously. Meanwhile, it also upgraded the economic assessments for both the country and the world. Policymakers now expect the spare capacity to be fully absorbed by 2H22.

On economic developments, the members acknowledged that “the outlook has improved for both the global and Canadian economies” and that “activity has proven more resilient than expected in the face of the COVID-19 pandemic, and the rollout of vaccines is progressing”. They, however, warned of “a difficult third wave of infection and lockdown”. The BOC currently forecasts +7% annualized growth in 1Q21 (vs. -2.5% previously) and +3.5% in 2Q21. Quarterly and annual growth forecasts in 4Q21 have been upgraded significantly to +5.4% and +6.5%, respectively.

On inflation, the BOC expects headline inflation to temporarily rise to near +3% in coming month, thanks to low base effects and rising energy prices, before pullback. Headline inflation estimates for 4Q21 and 4Q22 have been revised higher to +2.2% (vs. +1.5% previously) and +2.0% (vs. +1.9% previously) respectively reflecting the higher growth projections but partly offset by higher potential output.

On the monetary policy, the overnight rate stays unchanged at 0.25%. As noted in the forward guidance, the policy interest rate would stay at the effective lower bound “until economic slack is absorbed so that the 2% inflation target is sustainably achieved”. However, it expects this could happen “some time in the second half of 2022”, compared with 2023 previously. On QE purchases, the central bank announced that, “Effective the week of April 26, weekly net purchases of Government of Canada bonds will be adjusted to a target of $3B. This adjustment to the amount of incremental stimulus being added each week reflects the progress made in the economic recovery”. In the concluding paragraph, the members affirmed that “Decisions regarding further adjustments to the pace of net purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery”.