What could BoC's call to end bond-buying program mean for Canadians?

Highlights

• The BoC announced October 27 that it is putting an end to its bond-buying program amid inflationary pressures.
• The central bank hinted that rate hikes could be as early as April 2022.
• The bank claimed to be committed to bringing down inflation to the decided rate of two per cent.

The Bank of Canada announced Wednesday, October 27, that it is putting an end to its bond-buying program. Inflation has been skyrocketing and rising energy prices and supply chain bottlenecks have not helped, putting the bank under pressure.

The decision to prematurely end quantitative easing seemed a little abrupt. It was expected that Canada’s central bank would taper its bond-buying program from C$2 billion per week to C$1 billion per week but the bank instead chose to bluntly end it.

This was largely seen as a hint that an increment of benchmark policy rates will also be sooner than was previously expected. The bank had slashed interest rates in March 2020 in the wake of the COVID-19 pandemic with unemployment and lockdowns looming.

On Wednesday, the bank didn't change the status quo but analysts say rates could be hiked as early as April 2022. Some say 2022 could see as many as four interest rate hikes.

The bank said economies around the world were recovering and quoted vaccines and their distribution as a reason. It said the GDP of the country was expected to grow 6.5 per cent this year.

The bank also quoted the rise in employment levels. As per Statistics Canada, September saw an increase in 157,000 jobs which was a gain of 0.8 per cent, taking it over the level it was in February 2020 before the pandemic had hit. The employment rate was 60.9 per cent, 0.9 per cent higher than it was in February 2020.

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What is quantitative easing?

There are some tools governments and financial institutions possess to either introduce or reduce liquidity into the economy. Quantitative easing is one such tool.

Usually, it is the government that sets an inflation rate and the job of the central bank to ensure that is met. When there is a shortage of liquidity in the economy -- as was probably anticipated to be with the onset of the pandemic given that people would not be allowed to conduct business normally or work -- a central bank can buy long-term assets from the market as a way to supply more money to the market.

This is often used hand in hand with a reduction of interest rates. When these two tools are employed together, as was the case in Canada in March 2020, it creates a situation where there is more money available along with low-interest rates thereby encouraging lending, borrowing and spending and creating liquidity. In fact, most governments in the world resorted to this as the planet braced itself to be hit by the novel coronavirus.

This could potentially be a win-win situation at least in theory. The procurement of bonds by the central bank drives their rates up and supplies money to a market with low-interest rates allowing for more gainful investment.

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The effects were plain to see. By April 2021 the average national price for a house in Canada reached C$716,828, that is a whopping 31.6 per cent increase and a record year-over-year gain.

Financial assistance provided by the government at the height of the pandemic, which still continues, coupled with user-friendly apps to help retail investors participate in the stock market have seen the TSX Canadian Composite Index post various all-time highs.

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Bottom line

The Bank of Canada said Wednesday it is committed to absorbing inflation till it's the decided inflation rate of two per cent before it raises interest rates. It expects that this will happen in the second or third quarter of next year.

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With four interest rate hikes expected next year, how fast and by how much rates are hiked will have an impact on the average Canadian. That said, the central bank claimed to be committed to bringing down inflation to the decided rate and, generally, a country's economy works best when inflation is stable and not volatile. This, it advocates, helps Canadians make the best decisions with regards to their investments or spending.

This stability is seen as encouraging longer-term investments and growth in job creation that fuels a prospering, stable economy.