Revised forecasts predict inflation will flirt with a rate of five per cent over the rest of the year
Policy-makers said they would stop creating money to buy Government of Canada debt, an aggressive form of monetary policy called quantitative easing, or QE. The central bank’s holdings of federal debt climbed to about $425 billion during the crisis from about $100 billion at the start of 2020. The Bank of Canada intends to use the proceeds of maturing securities to continue purchasing securities, but will no longer be creating money to do so.
Fewer investors will have anticipated the shift in the Bank of Canada’s guidance for when it expects to raise the benchmark interest rate from its current setting of 0.25 per cent, a pivot that could result in a repricing of the currency and various debt securities. Policy-makers always said the timing of interest-rate increases was tied to their outlook, not the calendar, and the new forecast suggests demand will run up against the limits of the economy’s ability to generate non-inflationary growth sooner than previously thought.
But the main reason the “output gap” is closing faster than expected is because the central bank now estimates Canada’s economy can only grow at a rate of about 1.6 per cent before capacity constraints spark inflationary pressures — about one percentage point slower than before the pandemic.Article content
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