Bank of Canada on cusp of capping stimulus

The Bank of Canada will continue pulling back its support for the economy at a policy decision this week, paving the way for the start of interest rate increases next year amid inflation worries.

The Bank of Canada will continue pulling back its support for the economy at a policy decision this week, paving the way for the start of interest rate increases next year amid inflation worries.

Governor Tiff Macklem is expected to reduce weekly government bond purchases by one half on Wednesday to $1 billion (US$809 million). That will mark the fourth time over the past 12 months the central bank has rolled back a program that has poured hundreds of billions into the financial system since the start of the COVID-19 pandemic. 

Policy makers may even go as far as to formally announce they’ll stop growing bond holdings altogether, ending their quantitative easing program and effectively capping stimulus at current levels.

The sooner the central bank stops adding support to the economy, the faster they are expected to pivot to a tightening cycle. Investors are anticipating the Bank of Canada will start raising interest rates within the next six months, with markets pricing in four rate hikes next year.

“Inflation is more powerful than policymakers believed a few months ago,” Doug Porter, chief economist at Bank of Montreal, said by phone. “The world has changed and I think policy has changed.”