Afraid of inflation which is not temporary.
By Wolf Richter for WOLF STREET.
Following its policy meeting today, the Bank of Canada announced that it will end quantitative easing effective November 1. second half in 2022, with four rate hikes expected next year.
In response, Canada’s 2-year yield climbed 21 basis points, to 1.08%, after more than doubling in the past four weeks. The 1-year yield climbed 19 basis points today to 0.72%, after nearly tripling in the past five weeks:
The BoC started reducing its purchases of securities a year ago by ending its purchases of MBS and repeatedly reducing its purchases of GoC bonds. In the spring, she began to reduce her holdings of short-term Canada Treasuries and pensions. And that ended other smaller programs.
Its total assets, at C $ 502 billion, are down 13% from the March high:
The BoC holds C $ 426 billion in Government of Canada bonds. Her announcement today indicated that she would maintain roughly that level for now.
Pensions, the largest asset class on its balance sheet during the 2020 bailout, fell to just C $ 30 billion. The Government of Canada’s short-term treasury bills, formerly the third largest asset class, have all but disappeared.
He still holds C $ 17 billion in provincial bonds, C $ 5 billion in Government of Canada Real Return Bonds (what we would call TIPS in the United States), C $ 10 billion in derivatives and 5 billion. billion Canadian dollars from MBS. Other asset classes have already been wiped out, including corporate bonds, commercial paper and provincial money market securities.
As per today’s announcement, the top red line, GoC bonds, will flatten in the future:
So this is the end of QE in Canada. The BoC has said it will move to the “reinvestment phase,” where it no longer adds to its holdings of government securities, but only replaces maturing government securities with new government bonds. Canada.
These replacement purchases will not correspond “one to one” to securities that mature and leave the balance sheet “because the maturities are large and unevenly spaced,” he said in the separate procurement notice. Instead, the BoC will space out replacement purchases over time.
He will only buy Government of Canada bonds. Maturing real return bonds will be replaced by Government of Canada bonds. It will buy approximately one-third of Government of Canada replacement bonds in the primary market and two-thirds in the secondary market.
The BoC did not say when it would start letting Government of Canada bonds go off the balance sheet without replacement to reduce its holdings, which would allow long-term yields to drift higher. The start of this roll-off period can be scheduled to occur around the first rate hike. Allowing long-term yields to drift higher while raising short-term rates would keep the yield steeper. The roll-off would also reverse part of the earlier QE. In the graph above, this would appear with the top red line slanted downward, as other categories of securities have already done.
This is because inflation is not temporary.
Canada’s consumer price index in September hit a peak of 4.4%, the fastest rise since 1992, and it doesn’t really make much effort to be “temporary”, and it has rocked some nerves:
“The main forces driving prices up – higher energy prices and pandemic bottlenecks – now appear to be stronger and more persistent than expected,” the BoC said in a statement today.
“The Bank now expects CPI inflation to be high over the next year and fall back to around the 2% target by the end of 2022,” he said. declared.
Clearly, the BoC has moved away from the Fed-sponsored theme that this surge in inflation is not to be feared as it is temporary and will go away on its own, despite massive monetary stimulus in the country. Classes. It seems that only the Fed still clings to this hope of “temporary”, although here again, doubts have arisen.
Today’s inflation fears in the BoC statement are a belligerent departure from BoC Governor Tiff Macklem’s comments earlier in October, which largely ruled out the inflation spike. Thus, the BoC is now turning to efforts to fight inflation by at least removing monetary stimulus.
This, despite reduced growth, as real estate activity is expected to decline more rapidly.
This hawkish tone comes despite the BoC’s decline in growth expectations. In its monetary policy report, also released today, the BoC lowered GDP growth in Canada to 5.1% for 2021, which is still huge, but down from its projection of 6.0. % in July. Some of the factors driving lower but still burning growth expectations for 2021 include falling exports, declining business investment due to supply chain chaos and, most notably, a sharper drop in l real estate activity.
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