Canada: Bank of Canada keeps rates unchanged in July meeting, but reduces its QE program
July 14, 2021
At its meeting on 14 July, the Bank of Canada (BoC) held its target for the overnight rate at 0.25%—its effective lower bound—in line with market analysts’ expectations. That being said, the Bank decided to slow the pace of its quantitative easing program from CAD 3.0 billion of government bonds per week to CAD 2.0 billion per week.
The Bank’s decision to scale back the degree of monetary stimulus was predominately driven by still-recovering economic activity and rising inflationary pressures. The Bank noted economic activity domestically and abroad continued to grow robustly—supported by the ongoing vaccination roll out—even though the recovery remains uneven and the recent spread of new variants of the virus has raised uncertainty around economic output in H2. On the price front, inflation jumped to 3.6% in May, and while some factors seem temporary and core inflation levels remain lower, price pressures are expected to remain relatively elevated ahead due to ongoing supply disruptions and recovering activity.
Moreover, the Bank released updated GDP and inflation forecasts, and now expects GDP to grow 6.0% (April: +6.5% yoy) in 2021. The Bank now sees inflation averaging 3.0% in 2021 (April: +2.3%).
Looking ahead, 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 2.0 percent inflation target is sustainably achieved”. In terms of its quantitative easing program, the BoC stated that it will reduce its purchases accordingly in line with the strength and durability of the economic recovery.
Commenting on the outlook for monetary policy, Francesco Pesole, FX strategist at ING, noted:
“Our view remains that considering the resilience of the Canadian economy, high vaccination rates, concerns about a booming housing market and government bonds that have dropped quite sharply since mid-May, the BoC remains well on track to end its QE program by the end of the year. We are penciling in the first rate hike in 2H22, but the risks are increasingly skewed towards an earlier move.”
The next meeting is scheduled for 8 September.
Author: Stephen Vogado, Economist