Yahoo Finance Bank of Canada tapers massive stimulus program, says inflation is temporary
The Bank of Canada is pulling back on its massive stimulus plan intended to steer the economy through the COVID-19 pandemic.
It also says inflation is temporary but something to keep an eye on, and that the real estate market will give way to personal consumption.
The overnight rate is unchanged at 0.25 per cent, where it's been after a string of rate cuts during the pandemic. But the stimulus program called Quantitative Easing is being adjusted down by another $1 billion a week to a target pace of $2 billion.
"This adjustment reflects continued progress towards recovery and the Bank's increased confidence in the strength of the Canadian economic outlook," said the Bank of Canada in a release.
Prices of a number of goods that consumers typically use have risen during the pandemic, but Canada's central bank calls the situation temporary but something to monitor closely.
"Transitory supply constraints in shipping and value chain disruptions for semiconductors are also translating into higher prices for cars and some other goods," it said.
"With higher gasoline prices and ongoing supply bottlenecks, inflation is likely to remain above 3 per cent through the second half of this year and ease back towards 2 per cent in 2022, as short-run imbalances diminish and the considerable overall slack in the economy pulls inflation lower."
A hand-off from housing
The Bank of Canada also expects something of a hand-off from a housing market-driven economy to a consumption and business-based one.
"Consumption is expected to lead the recovery as households return to more normal spending patterns, while housing market activity is projected to ease back from historical highs. Stronger international demand should underpin a solid recovery in exports," said the Bank of Canada.
"As domestic and foreign demand increases and confidence improves, business investment will gain strength."
Bank of Canada Governor Tiff Macklem was asked about a moderating housing market during a news conference.
"Once we go back to a restaurant, do we really want a bigger kitchen?" he said.
Canada's economy and U.S. policy
The central bank also made some adjustments to its outlook for economic growth.
"The Bank now expects GDP growth of around 6 per cent in 2021 – a little slower than was expected in April – but has revised up its 2022 forecast to 4 ½ per cent and projects 3 ¼ per cent growth in 2023."
While the Bank of Canada has been more aggressive with its asset purchase tapering than the U.S. central bank, BMO senior economist Doug Porter expects monetary policy to be similar to the Federal Reserve, going forward.
"Overall, while the perception is that the Bank is quite hawkish, especially compared with the Fed, we ultimately expect very little daylight between the two banks when it comes to rate hike timing," said Porter.
"After all, the Canadian economy took a deeper hit in the past year, has more ground to make up, and is dealing with less frothy inflation than the U.S., partly due to a strong currency—hardly a recipe for a much more aggressive policy."
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.
Download the Yahoo Finance app, available for Apple and Android.
