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Canada Monetary Policy December 2020

Canada: Bank of Canada keeps rates unchanged in December; maintains asset purchasing program

On 9 December, the Bank of Canada (BoC) kept its target for the overnight rate at 0.25%, its effective lower bound, in line with market analysts’ expectations. Moreover, the Bank decided to maintain its quantitative easing program at its current pace of at least CAD 4.0 billion per week.

The Bank’s decision to stay put was mainly aimed at supporting the ongoing economic recovery. The BoC noted that the economic situation had improved in the third quarter, in line with expectations, but uncertainty surrounding the recovery remains elevated due to the recent spike in new Covid-19 cases domestically, and questions over the speed and extent of the vaccine rollout. Moreover, the Bank noted the government’s recently announced stimulus measures should support businesses and households throughout the second wave of the pandemic, but the recovery remains highly uneven across sectors and employment groups.

On the price front, higher oil prices have sparked inflationary pressures in recent months, but ongoing economic slack and a stronger CAD have kept inflation well below its 1.0–3.0% target range. Consequently, the BoC is committed to keeping its target for the overnight rate at its effective lower bound until “economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In [the Bank’s] current projection, this does not happen until into 2023.”

In terms of its quantitative easing program, the BoC will maintain its purchases until the economic recovery is well underway, and it will adjust them accordingly to ensure inflation is sustained at its target level.

In its communiqué, the Bank stated that it stands ready to provide the support needed to aid the recovery and ensure its inflation objective. Looking ahead, our panelists largely share the Bank’s projection that the target for the overnight rate will remain at its current level until at least 2023.

Commenting on December’s meeting, Sri Thanabalasingam, a senior economist at TD Economics, noted:

“Nothing too surprising today. The Bank maintained its accommodative policy stance in the face of dueling crosscurrents to its outlook. Surging caseloads and tighter restrictions will complicate Canada’s economic recovery in the near-term, with the peak impact likely bearing out early next year.”

The next meeting is scheduled for 20 January.

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