Thursday, 09 September, 2021

(BI) Bank of Canada Paves Way for Taper End, Quantitative

(BI) Bank of Canada Paves Way for Taper End, Quantitative Tightening
1. Bank of Canada Paves Way for Taper End, Quantitative Tightening

Central Bank Speaker
“Eventually, when we need to reduce the amount of monetary stimulus, you can expect us to begin by raising our policy interest rate. What this all means is it is reasonable to expect that when we reach the reinvestment phase, we will remain there for a period of time, at least until we raise the policy interest rate. But again, let me emphasize, when we get to the reinvestment phase and how long we are in it are monetary policy decisions that will depend on the strength of the recovery and the evolution of inflation. “
Tiff Macklem – Governor, Bank of Canada
Bank of Canada, Sept. 9, 2021
Quote located on page 6, click to view the full report
Perhaps the crux of Governor Tiff Macklem’s remarks was that the reinvestment phase will last at least until the Bank of Canada raises the policy interest rate. Market participants also know that the weekly purchases will be adjusted to match maturities over a longer period, as some months have rather large maturities. This is operationally efficient and more predictable for the market.
Now that it’s known the BoC will target C$4-$5 billion a month, we believe a cut to C$1.5 billion weekly is possible in October. The January meeting, with its fresh forecasts, seems an appropriate time for the bank to clearly communicate entry into the reinvestment phase. For rate hikes, September 2022 BAX futures are pricing in 35 bps, while Bloomberg Economics doesn’t expect liftoff until early 2023. (09/09/21)
2. Liftoff Priced for 2H22, Guidance Matters

Market Priced Less Aggressively Than Previous BoC

Source: Bloomberg Intelligence
The Bank of Canada’s policy-rate forward guidance may dictate how market participants adjust their timelines for liftoff and subsequent interest-rate increases, yet we don’t expect guidance to shift at this meeting. Market pricing for hikes is less aggressive than it was following the July interest-rate announcement. The market is factoring in liftoff from the effective lower bound in 2H22, which is when the BoC sees the output gap closing. Bloomberg Economics continues to favor a later rate hike — in early 2023 — than markets expect.
December 2022 bankers’ acceptance futures (BAX) are pricing in 55 bps of hikes, compared with 70 bps in July. Further out, March 2024 BAX futures are pricing in less than 4.5 interest-rate increases, compared to five hikes after the July announcement. (09/02/21)
3. September Skip, October Micro QE Cut?

Maturity Schedule of Central Bank GoC Holdings

Source: Bank of Canada
Though we didn’t expect a QE cut this September, the unexpected 2Q growth contraction along with the weaker-than-anticipated July reading solidifies our view. With rising coronavirus and growth concerns, the central bank has reason to remain dovish this meeting. The Bank of Canada may cut QE once more in October, by C$500 million, before entering the reinvestment phase in January. We believe the central bank will implement quantitative tightening, but not until the hiking cycle is well underway.
The image to the right shows the maturity schedule of Government of Canada (GoC) bonds held by the Bank of Canada. Monthly maturities don’t exceed C$6 billion until February, which informs our outlook. (09/02/21)
4. Canada’s CPI Far From Home, Expectations Still Anchored
Contributing Analysts Andrew Husby
Booming House Prices Lift Shelter Costs

Source: Bloomberg Economics, Statistics Canada
In Canada, consumer prices rose 0.6% in July, accelerating to 3.7% year-over-year from the prior 3.1%. The forecast-topping reading was a function of surging home prices and scramble for housing outside of urban centers amid the pandemic. The results point to a higher likelihood that prices hold close to 4% for the remainder of 2021, compared with our current baseline of about 3.5% — and twice the BoC’s 2% target. This may be reflected in the inflation-assessment portion of the central bank’s statement.
Though uncomfortably high, inflation expectations were well contained through 2Q, a point in favor of the transitory hypothesis. (09/02/21)
5. Covid-19 Risks Stand Out on BoC Monitor

New Covid-19 cases have risen significantly since the July interest-rate announcement, a risk the Bank of Canada will likely highlight in the announcement. However, vaccination rates have risen since the last meeting, with 66% of the nation fully inoculated. The 10-year Government of Canada bond has rallied, with both breakevens and real yields lower by 9 bps since June. Equities have risen and the Canadian dollar has depreciated, while commodity indexes have posted negative returns. The December 2021, 2022 BAX curve has flattened, while the two-years forward one-year GoC rate is near 1%.
Unemployment is falling steadily with the labor-market recovery well underway, and the central bank will continue to monitor market slack. Inflation measures are still rising, but the bank is likely to stick to its transitory narrative. (09/02/21)
Bank of Canada Monitor Since June Meeting

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Bank of Canada Paves Way for Taper End, Quantitative Tightening
2021-09-09 16:46:15.409 GMT

BI BITID=<1533482_V25.0>=
Perhaps the crux of Governor Tiff Macklem's remarks was that the reinvestment phase will last at least until the Bank of Canada raises the policy interest rate. Market participants also know that the weekly purchases will be adjusted to match maturities over a longer period, as some months have rather large maturities. This is operationally efficient and more predictable for the market.
Now that it's known the BoC will target C$4-$5 billion a month, we believe a cut to C$1.5 billion weekly is possible in October. The January meeting, with its fresh forecasts, seems an appropriate time for the bank to clearly communicate entry into the reinvestment phase. For rate hikes, September 2022 BAX futures are pricing in 35 bps, while Bloomberg Economics doesn't expect liftoff until early 2023.

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-0- Sep/09/2021 16:46 GMT

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https://blinks.bloomberg.com/news/stories/QZ6EL3T0AFB7