Bank of Canada likely to cut bond purchases next month

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The Bank of Canada is likely to reduce its bond purchases as soon as next month, strategists say, which would provide the clearest signal yet that Canada’s economy requires less help to emerge from the coronavirus crisis.

Such a move would put the Bank of Canada at odds with some other major central banks, such as the U.S. Federal Reserve and the European Central Bank, which have said they will maintain or even increase the pace of bond buying. The Fed is due to make an interest rate decision on Wednesday.

A reduction of purchases by the Bank of Canada could be supportive of the Canadian dollar, which has been the best performing G10 currency this year, with a gain of about two per cent against the U.S. dollar. The central bank said this month that the currency has been relatively stable against the U.S. dollar.

It could also temper concern that the central bank is taking too big a slice of Canada’s bond market. Its share is about 40 per cent, while the Fed owns less than 30 per cent of U.S. Treasury notes and bonds.

Strategists from Canada’s six largest banks expect the Bank of Canada to cut in April the amount of bonds it buys each week to $3 billion from $4 billion, with expectations of a cut getting a boost from Friday’s blockbuster jobs report.

“We’re expecting the reduction in asset purchases in April will coincide with less new issuance by the government,” said Josh Nye, a senior economist at Royal Bank of Canada.

Forecast upgraded for 1st quarter

The federal government is expected to issue fewer bonds over the coming fiscal year than it did in 2020-2021, when it ran a historically large budget deficit, estimated at 17.5 per cent of GDP, to support the economy. A reduction in supply tends to reduce upward pressure on borrowing costs.

The Bank of Canada said it has no comment. Last Wednesday, it upgraded its forecast for the first quarter, saying the economy was proving more resilient to a second wave of COVID-19 infections than expected and signalled it will reduce its purchases as it continues to gain confidence in the strength of the recovery.

Canada’s vaccination campaign has lagged some other countries but the price of oil and some of the other commodities that Canada produces have benefited from better prospects for global growth.

The Bank of Canada has already reduced the pace of purchases once before — from $5 billion last October, when it also changed the composition of its purchases to target more long-term bonds, maintaining at least as much stimulus as before.

A majority of the six strategists expect some further lengthening of maturities in the bonds purchased, which could lean against the recent move higher in long-term rates.

“The Bank of Canada should have taken the opportunity to taper its bond purchases this past Wednesday, but it will need very strong arguments if it chooses to pass again in April,” Derek Holt, vice-president of capital markets economics at Scotiabank, said in a note.



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