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Canada Monetary Policy January 2020

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

On 20 January, 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 economy lost momentum in the fourth quarter due to the reimposition of lockdown measures in some parts of the country since November. Strong government stimulus measures and the arrival of effective vaccines should support businesses and households over the medium term, but the recovery will likely remain uneven across sectors and employment groups until roughly H2 2021.

On the price front, higher oil prices have pushed inflationary pressures closer to the lower bound of the Bank’s 1.0%–3.0% target range in recent months, but ongoing economic slack and a stronger CAD have kept inflation well below the 2.0% midpoint. 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 January’s meeting, Benoit P. Durocher, senior economist at Desjardins Group, noted:

“Before it modifies key rates, the BoC will adjust the pace of its net bond purchases as the economic conditions change. If the immunization campaign progresses as planned, the BoC could begin to gradually reduce its purchases in 2021.”

The next meeting is scheduled for 10 March.

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