The Bank of Canada isn’t ready to increase interest rates just yet, but the central bank moved to end quantitative easing on Wednesday, (Oct. 27).
For much of the pandemic, the central bank has pumped stimulus into the economy through quantitative easing, buying up billions of dollars in federal government bonds to keep interest rates down. This new move will see the bank halt purchases of new bonds, except to replace existing holdings that mature.
The Bank of Canada’s interest rate remains at 0.25 per cent. However, the bank signalled that interest rates could rise in the second half of 2022. Bank of Canada governor Tiff Macklem has faced pressure to raise interest rates to stave off inflation, but hiking interest rates risks limiting Canada’s economic growth.
Macklem pointed to strong job growth in recent months and high vaccination rates for driving Canada’s economic recovery but noted that the employment rate in low-wage sectors continues to lag.
Meanwhile, inflationary pressures are being driven by bottlenecks in supply chains, as well as a global increase in energy costs. Macklem said that inflation issues are more stubborn than the bank originally anticipated.
“We know higher prices are challenging for Canadians, making it harder for them to cover their bills. I want to assure you that inflation is not going to stay as high as it is today, even if it is going to take somewhat longer to come down.”
Moshe Lander, professor of economics at Concordia University, said the best thing the Bank of Canada can do to tamp down inflation is nothing.
“Whatever policy stance the Bank takes, they’re going to do harm in some capacity. The best thing here is to do nothing and let the inflation work its way out.”
Lander said the most recent move from the central bank is a signal that Canada’s economy is recovering from the pandemic, but Canada still has a lot of ground to make up.
“Until we close that ground, we need to make up for lost time. We’ll tolerate a certain amount of inflation and policies that we wouldn’t normally allow for until we get back to a point where we can say we’ve come through the worst of it and we’re ready to come back to business as usual.”
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