Bank of Canada now sees inflation at target and output gap closing in 2022. Canadian dollar jumps

Author: Adam Button | Category: Central Banks

Highlights of the Bank of Canada interest rate decision:

Bank of Canada building sign
  • Bank of Canada tapers bond buys by $1B/week to a rate of $3B per week starting next wee
  • Rates left unchanged at 0.25%, as expected
  • Sees 2021 GDP at +6.5% vs +4.0% in January
  • Says activity has proven more resilient than expected in the face of the COVID-19 pandemic
  • "We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. Based on the Bank's latest projection, this is now expected to happen some time in the second half of 2022"
  • "Over the next few months, inflation is expected to rise temporarily to around the top of the 1-3 percent inflation-control range" but notes it's due to base effects
  • Forecasts assume $85B in Canadian stimulus, the US achieving broad immunity mid-year with Canada later in the year
  • Assumes restrictions lifted in mid-May. Says new wave represents a material setback but says it will be temporary
  • Says around 475K people would need to be hired to reach pre-pandemic levels
  • Sees US GDP up 7.0% in 2021 vs 5.0% in January forecast
  • Full text
  • Full text of MPR
This is hawkish. It moves up the output gap closing from 2023 to 2022 and tapers bond buys.

They say inflation will rise above target then decline towards 2% target in H2 of this year before declining further in H1 2022, then will be around 2% in the second half of next year.

If you read my preview, this is exactly as I forecast. The output gap timeline was brought forward and the BOC tapered by $1 billion. The idea of a dovish taper was ridiculous. The Canadian dollar jumped on the news, pushing USD/CAD down to 1.2522 from 1.2653 before the report.

Macklem speaks in a press conference at 11 am ET (1400 GMT).
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