By CentralBankNews.info
Canada’s central bank left its benchmark interest rate steady, as expected, and while it maintained its commitment to continuing large-scale asset purchase until a economic recovery is under way, it also said strains in short-term funding markets had eased and the economy should resume growing in the third quarter of this year.
The Bank of Canada (BOC) kept its target for the overnight rate at the effective lower bound of 0.25 percent after cutting it three times in March this year by a total of 1.50 percentage points.
In contrast to its policy statement in April, when it said it was ready to adjust the scale and duration of its stimulus measures as necessary, BOC today signaled a more policy neutral stance, saying “any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.”
BOC also voiced confidence Canada’s economy had avoided the most severe scenarios envisaged in its April monetary policy report, which laid out a range of possible economic outcomes rather than a base case projection due to the uncertainty about the length and containment of the Cover-19 pandemic.
“While the outlook for the second half of 2020 and beyond remains heavily clouded, the Bank expects the economy to resume growth in the third quarter,” BOC said, noting gross domestic product in the first quarter shrank 2.1 percent from the previous quarter, in the middle of the range seen in April due to the combined impact of falling oil prices and widespread shutdowns.
Economic output in the second quarter is likely to show a further decline of 10 to 20 percent as shutdowns and lower investment in the energy sector take a further toll on output, BOC said.
Consumer price inflation in Canada has also tumbled, hitting minus 0.2 percent in April, and BOC expects temporary factors to keep inflation below its target range of 2.0 percent, plus/minus 1 percentage point, in the near term.
It was the first drop in Canada’s consumer prices since September 2009.
After aggressive measures to ensure funding markets continued to function in March, BOC said strains had eased and it was reducing the frequency of its term repo operations to once a week and its program to purchase bankers’ acceptances to bi-weekly.
However, BOC said it was still ready to adjust these programs if market conditions warranted and it was continuing with its other programs of buying federal, provincial and corporate debt at their current frequency and scope.
“As market function improves and containment restrictions ease, the Bank’s focus will shift to supporting the resumption of growth in output and employment,” BOC said.
Today’s decision by BOC’s governing council marks a shift in leadership of the bank to Tiff Macklem from Stephen Poloz, who is retiring after 7 years.
Macklem, who lost out to Poloz as governor in 2013, participated in today’s meeting as an observer but the statement said he endorsed the decision and measures announced.
The Bank of Canada issued the following press release:
“The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent.
Incoming data confirm the severe impact of the COVID-19 pandemic on the global economy. This impact appears to have peaked, although uncertainty about how the recovery will unfold remains high. Massive policy responses in advanced economies have helped to replace lost income and cushion the effect of economic shutdowns. Financial conditions have improved, and commodity prices have risen in recent weeks after falling sharply earlier this year. Because different countries’ containment measures will be lifted at different times, the global recovery likely will be protracted and uneven.
In Canada, the pandemic has led to historic losses in output and jobs. Still, the Canadian economy appears to have avoided the most severe scenario presented in the Bank’s April Monetary Policy Report (MPR). The level of real GDP in the first quarter was 2.1 percent lower than in the fourth quarter of 2019. This GDP reading is in the middle of the Bank’s April monitoring range and reflects the combined impact of falling oil prices and widespread shutdowns. The level of real GDP in the second quarter will likely show a further decline of 10-20 percent, as continued shutdowns and sharply lower investment in the energy sector take a further toll on output. Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery. While the outlook for the second half of 2020 and beyond remains heavily clouded, the Bank expects the economy to resume growth in the third quarter.
CPI inflation has decreased to near zero, as anticipated in the April MPR, mainly due to lower prices for gasoline. The Bank expects temporary factors to keep CPI inflation below the target band in the near term. The Bank’s core measures of inflation have drifted down, although by much less than the CPI, and are now between 1.6 and 2 percent.
The Bank’s programs to improve market function are having their intended effect. After significant strains in March, short-term funding conditions have improved. Therefore, the Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations. The Bank stands ready to adjust these programs if market conditions warrant. Meanwhile, its other programs to purchase federal, provincial, and corporate debt are continuing at their present frequency and scope.
As market function improves and containment restrictions ease, the Bank’s focus will shift to supporting the resumption of growth in output and employment. The Bank maintains its commitment to continue large-scale asset purchases until the economic recovery is well underway. Any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.”
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