MACRO: Lonnie sinks after BOC tapers bond purchases

7:26 PM April 21, 2021

  • BoC lowers bond purchases
  • Rates left unchanged at 0.25%

The Bank of Canada left its key overnight rate unchanged at 0.25% , in line with expectations as the annual inflation rate in Canada rose to a 13-month high of 2.2% in March from 1.1% in February, slightly missing market expectations of a 2.3% increase. Central Bank  tapered bond buying target to C$3 billion from C$4 billion, starting from April 26th.  Policymakers noted that economic activity has proven more resilient than expected in the face of the COVID-19 pandemic, as households and companies adapted to the second wave and associated restrictions. GDP growth forecasts were revised higher for 2021 (6.5% vs 4%) but were lowered to 2022 (3.7% vs 4.8%). The inflation is expected to rise temporarily to around the top of the 1-3% inflation-control range, due to base-year effects and higher oil prices. Still, the Bank expects it to ease back toward 2% on a sustained basis sometime in the second half of 2022. And the punchline: "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 sometime in the second half of 2022." This is important, because due to the inflation concerns, BoC now sees the rate adjustment in the second half of 2022 versus 2023.

USDCAD pair rose a few minutes before the BoC rate decision after Bloomberg cited what appears unverified MT Newswires headline which said "Bank of Canada Maintains Its QE Purchases", which was contrary to market expectations that the BoC would lower its bond purchases. After the actual BoC statement, the currency pair fell sharply and is currently testing support at 1.2480. Source: xStation5

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