The Globe and Mail reports in its Monday, July 19, edition that on Wednesday, the Bank of Canada left its target for the overnight rate at 25 basis points while scaling back its quantitative easing program. The Globe's guest columnists Steve Ambler and Jeremy Kronick write that lifting its foot off the QE pedal is warranted given recent inflation readings and other underlying metrics. At the same time, however, the unchanged overnight rate target actually represents an easing of monetary policy since the bank's last announcement six weeks ago, because inflation expectations have increased, and the recovering economy has probably raised the level of the overnight rate that would be consistent with steady growth and 2-per-cent inflation. With the bank's policy rate at its effective lower bound, higher inflation expectations combined with a higher neutral rate suggests policy is more stimulative than it was six weeks ago.
Further tightening is likely required, which can be accomplished through further reductions in bond purchases as a first step. Eventually, it could mean bringing forward the timing for rate hikes, which Wednesday's announcement suggested would not happen until the second half of 2022.
© 2021 Canjex Publishing Ltd. All rights reserved.