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Bank of Canada Readies Rate Call: When Will Rates Rise?

Documents suggest that the Federal Government will watch closely as the Bank of Canada readies a rate call. The Bank is set to slow down rates of bond-buying, forcing Federal officials to reevaluate their lack of concern over the impact of central bank actions on managing government debt.

Recent documents obtained by The Canadian Press under the Access to Information Act show that last year’s briefing notes avoided details on the bank’s bond-buying program. This oversight was in spite of the program’s significant effects on debt yields.

Interest rates have been at historic lows since the beginning of the pandemic. The central bank kept this key rate at near-zero (0.25 percent) and purchased federal bonds at an unprecedented pace. These tactics were the central bank’s first use of QE: Quantitative Easing. Federal debt was also kept to a minimum during the pandemic thanks to the treasury expending billions of dollars in funds for replacing lost income for Canadian residents, workers’ wages, businesses, and students. Liberals are attempting to take advantage of the low rates to lock in new debt in long-term bonds, with debt expected at $1.2 trillion for the fiscal year.

The December briefing note obtained by the press noted that management of Federal debt should take into account “the risks associated with exogenous changes” to the QE program.

Canadian Press reports: “The Bank of Canada is widely expected to reduce its weekly purchases of federal bonds as part of a scheduled rate announcement on Wednesday morning. If it pulls back from purchases, demand for federal bonds would drop, and rates would rise, which could affect the cost for the federal government to refinance billions in debt coming due.”

According to Scotiabank’s director of fiscal and provincial economics, the connection to debt means the central bank will be required to explain any changes in bonds purchased. This means the markets won’t have to worry that the decisions being made are in the interest of federal finances.

“Markets also need to feel that the central bank is independent because that’s how inflation expectations are anchored. If there’s a concern that the Bank of Canada is maintaining its QE program to keep the government’s financing costs low, that would really spook markets, because they would think, ‘OK, they’re now they’re driven by keeping those public debt charges down.” – Rebekah Young

According to the same December briefing note, the longer the rates remain so low, the Federal Government “can maintain its progressive approach to lock in more of its debt into long-term issuances.” Spikes, however, can take place when numbers revolving around Covid-19 cases shift (increase in cases, renewed lockdowns, new variants).

What Canadians want to know is: When will rates rise?

Financial Advisor Elliot Hughes stated: “I suspect that the bank isn’t going to want to make any drastic moves until they’ve got a really good sense of what the world looks like.”

Avery Shenfeld said the Bank of Canada will likely keep its pledge to maintain low rates until the second half of 2022: “Not to say that the Bank (of Canada) pays attention to elections, but the government will also be happy if its central bank avoids rattling Canadians about earlier rate hikes if a September election is in the offing.”

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