By CentralBankNews.info
Canada’s central bank left its key interest rates steady at what it describes as the effective lower bound and will continue purchasing Canadian government bonds of at least $5 billion a week, adding the economy will continue to require extraordinary monetary policy support as its moves from “reopening to recuperation.”
The Bank of Canada (BOC) kept its target for the overnight rate at 0.25 percent, as widely expected, after cutting it three times in March by a total of 150 basis points. The bank rate was also left at 0.50 percent and the deposit rate at 0.25 percent.
Under the first governing council meeting chaired by Governor Tiff Macklem, who replaced retiring Stephen Poloz last month, BOC said the policy interest rate would be kept at the effective lower bound until economic slack is absorbed so the 2.0 percent inflation target is achieved.
“To support the recovery and achieve the inflation objective, the Bank is prepared to provide further monetary stimulus as needed,” BOC said in a more specifically dovish guidance than in June when it merely said any further policy actions would be calibrated to provide the necessary degree of policy accommodation to achieve the inflation target.
BOC said its support of financial markets since March, such as term repo operations, are having their intended effects of reducing market strains while the purchases of provincial and corporate bonds will continue and it “stands ready to adjust its programs if market conditions warrant.”
In an update to its economic forecast that included a central scenario based on no second wave of the Covid-19 virus rather than the normal base-case projections, BOC estimated economic activity in the second quarter of this year was 15 percent below the second quarter of 2019, the steepest decline since the Great Depression but still less severe than in its worst scenarios envisaged in April.
“There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output,” BOC said, adding decisive fiscal and monetary policy actions have supported incomes and helped lay the foundations for a recovery.
Some 40 percent of the economic collapse in the first half of the year is expected to be made up in the third quarter but the economy’s recuperation will then slow as the pandemic continues to affect consumer confidence and behavior, and as the structure of the economy adjusts.
Canada’s economy is seen contracting by 7.8 percent this year, down from 2019 growth of 1.7 percent, and then expanding 5.1 percent in 2021 and 3.7 percent in 2022.
However, economic slack will persist and inflation is seen averaging 0.6 percent this year, down from 1.9 percent last year, and then slowly rise to 1.2 percent in 2021 and 1.7 percent in 2022.
Canada’s inflation rate has dropped in recent months, with consumer prices down an annual 0.4 percent in May following a 0.2 percent fall in April, well below its 2.0 percent target.
After plunging in March against the safe-haven bought U.S. dollar, the Canadian dollar rebounded through early June. But since then it has largely been moving sideways and was trading around 1.35 to the U.S. dollar today, down 3.7 percent since the start of this year.
The Bank of Canada released the following statement:
“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. The Bank is also continuing its quantitative easing (QE) program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds. The Bank’s short-term liquidity programs announced since March to improve market functioning are having their intended effect and, with reduced market strains, their use has declined. The provincial and corporate bond purchase programs will continue as announced. The Bank stands ready to adjust its programs if market conditions warrant.
While economies are re-opening, the global and Canadian outlook is extremely uncertain, given the unpredictability of the course of the COVID-19 pandemic. Reflecting this, the Bank’s July Monetary Policy Report(MPR) presents a central scenario for global and Canadian growth rather than the usual economic projections. The central scenario is based on assumptions outlined in the MPR, including that there is no widespread second wave of the virus.
After a sharp drop in the first half of 2020, global economic activity is picking up. This return to growth reflects the relaxation of necessary containment measures put in place to slow the spread of the coronavirus, combined with extraordinary fiscal and monetary policy support. As a result, financial conditions have improved. The prices of most commodities, including oil, have risen from very low levels. In the central scenario, the global economy overall shrinks by about 5 percent in 2020 and then grows by around 5 percent on average in 2021 and 2022. The timing and pace of the recovery varies among regions and could be hampered by a resurgence of infections and the limited capacity of some countries to contain the virus or support their economies.
The Canadian economy is starting to recover as it re-opens from the shutdowns needed to limit the virus spread. With economic activity in the second quarter estimated to have been 15 percent below its level at the end of 2019, this is the deepest decline in economic activity since the Great Depression, but considerably less severe than the worst scenarios presented in the April MPR. Decisive and necessary fiscal and monetary policy actions have supported incomes and kept credit flowing, cushioning the fall and laying the foundation for recovery. Since early June, the government has announced additional support programs, and extended others.
There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output. In the central scenario, roughly 40 percent of the collapse in the first half of the year is made up in the third quarter. Subsequently, the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges. As a result, in the central scenario, real GDP declines by 7.8 percent in 2020 and resumes with growth of 5.1 percent in 2021 and 3.7 percent in 2022. The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures.
CPI inflation is close to zero, pulled down by sharp declines in components such as gasoline and travel services. The Bank’s core measures of inflation have drifted down, although by much less than the CPI, and are now between 1.4 and 1.9 percent. Inflation is expected to remain weak before gradually strengthening toward 2 percent as the drag from low gas prices and other temporary effects dissipates and demand recovers, reducing economic slack.
As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In addition, to reinforce this commitment and keep interest rates low across the yield curve, the Bank is continuing its large-scale asset purchase program at a pace of at least $5 billion per week of Government of Canada bonds. This QE program is making borrowing more affordable for households and businesses and will continue until the recovery is well underway. To support the recovery and achieve the inflation objective, the Bank is prepared to provide further monetary stimulus as needed.”
