The BOC surprised to the hawkish side at the October meeting. Policymakers announced to end the QE program and begin the reinvestment process, compared with consensus of a reduction to the weekly purchase of CAD1B. While leaving the overnight rate unchanged at the effective lower bound of 0.25%, the timing for the first rate hike was pushed forward. While downgrading GDP growth forecasts for this year and 2022, inflation projections were revised higher through to 2023.
As noted in the statement, inflation pressures have been “stronger and more persistent than expected”. Meanwhile, supply chain disruption and production bottlenecks “are not easing as quickly as we expected”. These suggested that inflation would “probably going to take a little longer to come back down”. Headline readings were projected to reach 3.4% in both 2021 and 2022, up from July’s forecasts of +3% and +2.4%, respectively. Inflation was expected to slow to about +2% towards end-2022 as supply disruptions ease, before reacceleration due to excess demand. Inflation will then ease to +2.3% in 2023, compared with July’s 2.2%.and 2023 was a touch higher at 2.3% (July: 2.2%).
The staff downgraded GDP growth forecasts to +5.1% and +4.3% for 2021 and 2022, from July’s +6% and +4.6%, respectively. As noted in the statement, “more severe supply disruptions and weaker foreign demand” were the key drivers of the downgrades. GDP growth for 2023 was, however, revised higher to +3.7% (July: +3.3%). The central bank cautioned over the high uncertainty of the outlook due to supply disruptions, labour market mismatches, and accelerated digital investments.
On the monetary policy, the BOC announced an end to QE and the beginning of the reinvestment phase. It also maintained the policy rate at 0.25%. Policymakers reiterated that the policy rate will stay at where it was “until economic slack is absorbed so that the 2% inflation target is sustainably achieved”. Yet, they expected that to happen “sometime in the middle quarters of 2022, compared with previous estimate of “the second half of 2022”.
