Julie Gordon, David Ljunggren

OTTAWA (Reuters), -The Bank of Canada said Wednesday that they could raise interest rates 3 months sooner than expected and warns inflation will stay high for most of 2022 because of higher fuel prices and supply disruptions.

According to expectations, the overnight rate of Canada’s central bank was held at 0.25%. The central bank also announced it is ending its bond-buying programme.

In its quarterly monetary policy report, it stated that the Canadian economy was once again growing strongly. “The Bank anticipates that the economic slack would be taken in the middle of 2022,” it stated.

This was due to the difficulties of opening an economy that is still affected from COVID-19.

Doug Porter is chief economist at BMO Capital Markets. He stated that “there’s no real need for an extremely-stimulative monetary policy at the moment.” We expect rates to rise in July next year and would like for increases of one quarter of a point each calendar quarter.

The first rate increase in money markets is now expected to occur in March, as opposed to April prior.

FULL REECOVERY

Canadian dollars traded 0.5% lower at 1.2327 against the greenback (81.12 U.S. Cents). The 2-year yield reached 1.147% which was its highest level since March 2020. It then dropped to 1.073% by 20.6 basis points.

In the past, The Bank predicted that a full recovery would occur sometime during 2022’s second half. It also stated previously that it would continue to maintain current rates until this happened.

However, slower growth combined with disruptions in supply chains suggest that the output gap might be smaller than initially thought. The central bank lowered Canada’s outlook for economic growth this year from 6.0% to 5.1% in July’s forecast.

According to the bank, headline inflation should remain at or above 1% to 3.3% for longer than initially thought. The target will be reached in 2022, when it will start to fall back towards its goal. Inflation is expected to be 4.8% by the end of the year and then will fall to 2.1% by the end of the 2022 quarter.

According to it, “These revisions are indicative of the longer and more permanent effects from supply constraints aswell as higher energy prices.”

These supply-chain bottlenecks will be mostly resolved by next year’s end, the report stated. Export recovery will be driven by strong foreign demand. However, investment in businesses outside the oil-and gas sector is expected to rise as supplies become more flexible.

According to the Bank, the program of bond-buying that was intended to mitigate the effects of the coronavirus epidemic will move to the reinvestment phase. It will buy enough Canadian bonds to replace the ones that have matured.

November 1 will be the last day of Bond-buying. The initial target for total monthly purchases is between C$4 and C$5 trillion.