Despite well telegraphed signals, the Bank of Canada (BoC) managed to surprise markets with their announcement today.
The As Expecteds.
No change to the overnight rate
The BoC announced a taper in their bond buying from $4bn to $3bn a week. No specific details on how this will be done, but we expect the bulk of the reduced purchasing to be between the 2y and 5y part of the curve.
A material upgrade to growth forecasts – 2021: 6.5%; 2022: 3.75%
The economy is expected to be at full capacity and inflation to hit target of 2% in the latter half of 2022 (instead of 2023).
The odds of a rate hike in the second half of 2022 have increased
We anticipate upward pressure on interest rates across maturities with a bias to curve flattening.
The Loonie is on fire today, as the market assumes the BoC will hike rates ahead of the Federal Reserve (Fed). We suspect that the Fed will also be hiking in 2022, so the strength in the Canadian dollar might not persist.