Canada, First Advanced Economy to Tighten Monetary Policy... Asset Purchase Scale Reduced by 25%

Weekly Government Bond Purchase Reduced from 4 Billion CAD to 3 Billion CAD
"Base Rate Hike Expected in Second Half of Next Year"... Canadian Dollar Surges 1.2% Intraday

Tiff Macklem, Governor of the Bank of Canada
[Photo by Reuters]

[Asia Economy Reporter Park Byung-hee] On the 21st (local time), Canada shifted its monetary policy direction to tightening. Last month, some emerging countries such as Brazil, Turkey, and Russia raised their benchmark interest rates for the first time since COVID-19, switching their monetary policy direction to tightening. Among advanced countries, Canada was the first to change its monetary policy direction.

According to Bloomberg News on the 21st (local time), the Bank of Canada (BOC) decided at its monetary policy meeting to reduce the weekly government bond purchase amount from at least 4 billion Canadian dollars to 3 billion Canadian dollars. The BOC explained the reason for reducing asset purchases by stating that the economic recovery is stronger than expected. In its report, the BOC significantly raised its economic growth forecast for this year from the previous 4.0% to 6.5%.

The BOC maintained a cautious stance regarding raising the benchmark interest rate. It stated that it will not raise the current benchmark interest rate of 0.25% until the economic recovery becomes clear and the inflation rate consistently stays at 2%.

However, the expected timing for the interest rate hike was moved up slightly. The BOC said in its report that considering the current economic forecast, it expects the benchmark interest rate to be raised in the second half of next year. Bloomberg reported that the market expects the interest rate to be raised around this time next year at the earliest.

The U.S. central bank, the Federal Reserve (Fed), is still maintaining its easing stance by purchasing assets worth 120 billion dollars monthly as part of its quantitative easing policy. Additionally, Jerome Powell of the Fed has repeatedly emphasized that there will be no interest rate hikes until next year.

As expectations arose that Canada would proactively reduce the scale of quantitative easing and raise benchmark interest rates earlier than the U.S., the Canadian dollar's value against the dollar rose sharply in the foreign exchange market on the day. The Canadian dollar surged by as much as 1.2% against the dollar during the session.

Among market participants, there is a forecast that the BOC could be the first among advanced countries to tighten. This is because Canada's employment market has recovered about 90% compared to before COVID-19. The U.S. employment market recovery rate is just over 60%.

Bloomberg explained that the BOC's tightening measure is effectively the second time. In October last year, the BOC had already reduced the minimum weekly purchase amount from 5 billion Canadian dollars to 4 billion Canadian dollars. However, at the time of the reduction in October last year, the BOC adjusted its policy by increasing the proportion of long-term government bond purchases, stating that the asset purchase reduction then was not tightening but neutral.