Today in Forex: BoC Announces End to Quantitative Easing Program

Snapshot

The Bank of Canada (BoC) surprised financial markets today by announcing an early end to its Quantitative Easing (QE) program and possibly accelerating its timing of interest rate hikes to April 2022 in order to counter inflationary pressures due to supply chain disruptions, although the central bank left its benchmark Overnight Rate steady at 0.25% as expected. 

This important forex news prompted a sharp decline in USD/CAD as the Canadian dollar strengthened quickly after its release. USD/CAD had been trading as high as 1.2432 before the BoC report and promptly fell to 1.2300 shortly after it came out. 

A 15-minute candlestick chart of USD/CAD shows the sharp drop after the BOC’s surprise announcement of an end to its QE program. Source: MetaTrader5.

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Detail

By concluding the Bank of Canada’s economic stimulus program of buying bonds and pushing forward the timing of future interest rate rises that could come as early as April, BoC policymakers have effectively tightened monetary policy in Canada. 

The BoC’s initial press release stated that: “With the economy once again growing robustly, Governing Council judged that QE is no longer needed. This means we will stop growing our holdings of Government of Canada bonds.”

During the press conference held shortly after the Overnight Rate release today, BoC Governor Tiff Macklem confirmed the QE program’s conclusion by stating “We took an important step today, we ended quantitative easing.” Macklem went on to say that, “we will be considering raising interest rates sooner than we previously thought. So interest rates don’t need to be as low for as long to get that full recovery and to get inflation back.”

During the COVID-19 pandemic, the BoC’s QE program injected hundreds of billions of Canadian dollars worth of liquidity into the Canadian economy with the goal of combating widespread weakness due to the pandemic and measures taken to slow its spread in Canada.

Another notable factor behind the relative strength of the Canadian economy that prompted the Governing Council to approve this BoC move was the Canadian government’s policies that had facilitated employers keeping their employees on payrolls during the pandemic, which then sped up Canada’s labor market recovery as the pandemic waned.