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Canada Monetary Policy July 2020

Canada: Bank of Canada keeps rates unchanged in July, continues with asset purchasing programs

On 15 July, the Bank of Canada (BoC) kept its target for the overnight rate at 0.25%, its effective lower bound. The decision had been expected by market analysts and echoed the decision taken in June. Moreover, the Bank decided to maintain its quantitative easing program at its current pace.

The Bank’s decision to hold the target for the overnight rate at its lower bound was mainly to support the economic recovery. The Bank noted the economy seems to be stabilizing, but uncertainty surrounding the recovery remains elevated due to the unknown evolution of the virus domestically and globally. Consequently, in its quarterly monetary policy report the Bank unveiled a central scenario forecast for growth and inflation with key assumptions around the pandemic included in the forecast, in contrast to its standard economic projections.

On the price front, despite a recovery in oil prices in recent months after having plummeted at the start of the pandemic, the consumer price index continued to fall year-on-year in May. Moreover, the Bank expects “economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures”. Therefore, the Bank is committed to keeping its target for the overnight rate unchanged and will proceed with its unconventional policy tools until inflation returns to its 2.0% objective.

In terms of its asset purchasing since the start of the pandemic, the Bank noted: “This QE program is making borrowing more affordable for households and businesses and will continue until the recovery is well underway.”

In its communiqué, the Bank stated it will stand ready to add further support to the economy should conditions deteriorate.

Looking ahead, our panelists expect the Bank to keep the target for the overnight rate at its current level for the remainder of the year. Unprecedented monetary and fiscal stimulus domestically and abroad, in tandem with easing lockdown measures, have reduced financial market strains and sparked a healthy recovery in commodity prices—which bodes well for the GDP and inflation outlook. That said, uncertainty over the virus is creating a fragile economic panorama and it will likely take a considerable economic rebound and a widely available vaccine before the Bank considers a change of course—which based off its current projections could be as late as 2023.

Commenting on July’s meeting, Brian DePratto, a senior economist at TD Economics, noted:

“No surprises here. With uncertainty still extremely elevated, the Bank of Canada is not taking any chances, maintaining stimulus, and reminding us again that they can and will do more to support the economy if needed.”

The next meeting is scheduled for 9 September.

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