TORONTO (Reuters) – The Bank of Canada held its key overnight interest rate at a record low 0.25% as expected on Wednesday and said it would cut its weekly net purchases of government of Canada bonds to a target of C$2 billion ($1.6 billion) from C$3 billion.

In a statement, the central bank said it remained committed to keeping the interest rate unchanged until economic slack was absorbed. This is expected to happen some time in the second half of 2022.

STORY:

MARKET REACTION: CAD/

LINK: https://www.bankofcanada.ca/2021/07/fad-press-release-2021-07-14

COMMENTARY

JOSH NYE, SENIOR ECONOMIST AT ROYAL BANK OF CANADA:

“The reduction in asset purchases to C$2 billion per week is in line with what we have been expecting and continues a process that we think will ultimately see the Bank of Canada switching to reinvestment only sometime around the turn of this year.”

“There were some tweaks to their GDP forecast, it sounds like they still see the economy reaching full capacity sometime in the second half of next year, which is unchanged from what they were saying in April.”

“There’s no indication that these strong inflation readings are forcing the bank to reevaluate their monetary policy.”

ANDREW KELVIN CHIEF CANADA STRATEGIST AT TD SECURITIES:

“There’s nothing too surprising here. They did open the door just a crack that (inflation) could be a bit more sustained than they’d anticipated, but the message is still that inflation is just transitory. They have the same date for fully absorbing slack in the economy in the second half of 2022, and the tapering was expected. So I’d say this is really just the bank continuing on the path they set out in April and once we get to October we’ll have more information on the amount of pent-up demand in the economy, we’ll have more information on whether or not CPI is transitory and hopefully we’ll have a bit more information on how the winter will look from public health perspective.”

“No surprises here.. It would have been a needless provocation for them to do anything other than what they did, and I think things will become a bit more interesting for the Bank of Canada once we get to the fall.”

“They’re just acknowledging the fact that inflation had been stronger than they anticipated through the middle part of 2021 and I think as a forecaster when you do have such a significant miss on a variable like that, they just need to accept that there is more uncertainty around the inflation outlook than they previously anticipated… I don’t think it is an indication that they are seriously questioning the path that they’ve laid out.”

DEREK HOLT, VICE PRESIDENT OF CAPITAL MARKETS ECONOMICS AT SCOTIABANK:

“They broadly met expectations. They said that they would reduce stimulus measures in gradual and measured fashion, so cutting all the purchases down to C$2 billion and sounding optimistic, but not guiding towards premature further tightening.”

“I think they will end net purchases of bonds by the end of this year and move towards tightening by next summer. The risks could still be tilted earlier rather than later.”

(Reporting by Nia Williams, Steve Scherer; Editing by Denny Thomas)

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