The Bank of Canada is scaling back its massive asset purchase program known as quantitative easing, while also while signalling higher interest rates — and bigger variable mortgage payments — might be coming sooner than previously expected.
"Effective the week of April 26, weekly net purchases of Government of Canada bonds will be adjusted to a target of $3 billion," said the Bank of Canada in a release.
"This adjustment to the amount of incremental stimulus being added each week reflects the progress made in the economic recovery."
The overnight rate stays at 0.25 per cent. But Canada's central bank is forecasting its inflation target will be reached earlier than 2023, as it previously said.
"As slack is absorbed, inflation should return to 2 per cent on a sustained basis some time in the second half of 2022."
An eye on housing
That means the Bank of Canada could raise its overnight rate sooner than expected. An increase to the overnight rate means variable rates will go up.
"Now is a good time for anyone currently holding a variable rate to consider locking into a fixed rate. However, staying in a variable rate has proven to be the most cost-effective strategy for the last 50 years," said Ratehub.ca co-founder James Laird.
"The positive outlook also means that fixed rates should continue to drift up throughout the remainder of 2021."
Rock-bottom mortgage rates have been a key driver of Canada's hot housing markets, and the Bank of Canada says it's keeping an eye on the situation.
"Housing construction and resales are at historic highs, driven by the desire for more living space, low mortgage rates, and limited supply," it said.
"The Bank will continue to monitor the potential risks associated with the rapid rise in house prices."
Bank of Canada Governor Tiff Macklem applauded recent measures aimed at stabilizing the housing market.
"We welcome the recent proposal by the superintendent of financial institutions to introduce a fixed floor to minimum qualifying rate for uninsured mortgages," he said at a news conference.
"New measures just announced in the federal budget will also be helpful."
Optimism about the economy and a higher loonie
The Bank of Canada is also more upbeat about the economy and is now forecasting real GDP growth of 6.5 per cent in 2021.
"The Bank of Canada has made a drastic U-turn in the space of three months from being extremely cautious to being extremely upbeat," said Benjamin Reitzes, director, Canadian rates & macro strategist, at BMO.
"While there's still some ways to go until we get a move on rates, the Bank has taken the first step toward exiting QE, in what is clearly a more hawkish statement than markets anticipated. We'll be actively reviewing our forecasts on the back of the BoC's shift."
The Bank of Canada's upbeat tone also pushed the loonie higher.
"Of course, by signalling that policy is poised to tighten, the Bank risks putting sustained upward pressure on the exchange rate," said Karl Schamotta, chief market strategist at Cambridge Global Payments.
"The Canadian dollar spiked more than 120 basis points after the announcement, breaking through a number of key technical and psychological levels as traders revised expectations upward."
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.