The Taper Next Door: Bank of Canada cuts bond purchases by 25%. Total assets decrease by 13%. Rate hikes progress, possibly in July 2022

The madness of housing is at the center of concerns.

By Wolf Richter for WOLF STREET.

The Bank of Canada, which already owns over 40% of all outstanding Government of Canada (GC) bonds – compared to the Fed, which holds less than 18% of all outstanding US Treasury securities – announced today that it would reduce by a quarter the amount of Government of Canada bonds it adds to its stack, from the current C $ 4 billion per week to C $ 3 billion per week as of April 26 .

In his statement, he pointed to the madness of the Canadian housing market – “we are seeing signs of extrapolative expectations and speculative behavior,” he said.

In October, the BoC made the first cut, reducing purchases of GoC bonds from C $ 5 billion per week to C $ 4 billion, and stopped adding mortgage-backed securities, including she had never bought much at the start.

In March, the BoC announced that it would unwind its liquidity facilities, reducing its total assets by about 17%, from C $ 575 billion at the time to C $ 475 billion at the end of the month. ‘April. And it progressed as planned.

The BoC cited the “moral hazard” associated with this central bank foolishness as one of the reasons for the unwinding of its liquidity facilities, which are now mostly repurchase agreements (pensions) and treasury bills. short term of the Government of Canada. Its total assets fell 13% over the past month, to C $ 501 billion on its most recent balance sheet for the week of April 14:

The total amount of assets has decreased as the BoC unwinds its liquidity facilities. The largest remaining categories are term pensions and short-term treasury bills. As they mature, the BoC gets its money back, but doesn’t replace those securities, and the balance goes down. Other asset classes like MBS, provincial bonds, corporate bonds, etc. – the lines at the bottom of the graph – have mostly been untied or are tiny.

The red line represents the stack of GoC bonds that continues to grow, but their growth will slow from C $ 4 billion per week to C $ 3 billion per week, starting next week:

The BoC also announced in the declaration that it would maintain its key interest rates, the overnight rate at 0.25%, the discount rate at 0.5% and the deposit rate at 0.25%.

But the rate hikes have been postponed until the second half of next year, and as early as July of next year.

Or maybe sooner or later: “In the current context, however, there is considerable uncertainty over the timing, especially in light of the complexity of assessing supply and demand that I have. mentioned earlier, ”explained BoC Governor Tiff Macklem. opening statement.

But the madness of the housing market in Canada was at the center of the concerns.

“The Bank will continue to monitor the potential risks associated with rapidly rising house prices,” he said in the policy statement.

“You won’t be surprised to learn that we’ve also spent some time discussing what’s going on in the housing market,” Macklem said in his opening speech. Here’s some informations:

“The pandemic has led to unique circumstances. With so many households working and studying at home, we are seeing a lot of people who want more living space. And interest rates have been unusually low, which makes borrowing more affordable, ”he said.

“We are seeing signs of extrapolative expectations and speculative behavior,” he said.

“Given the high levels of household indebtedness and the risks that households could oversize in the face of rising house prices, we welcome the recent proposal by the Superintendent of Financial Institutions to introduce a fixed floor for the rate. minimum qualification for uninsured mortgages, ”he said. .

“The new measures just announced in the federal budget will also help,” he said, including the 1% annual tax on vacant housing owned by non-residents of Canada.

“We are following developments in the housing market very closely, and will say more about that in our financial system review next month,” he said.

And for your amusement, here is the explosion in house prices in Toronto, according to the Teranet National Bank HPI, whose method (sales in pairs) is comparable to the Case-Shiller index in the United States. Over the past two years, the index has jumped 18% from already very high levels:

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About Robert Valdivia

Robert Valdivia

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