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Canada Monetary Policy June 2020

Canada: Bank of Canada keeps rates unchanged in June, sustains asset purchasing programs

On 3 June, 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. Moreover, the Bank decided to scale back the frequency of its term repo operations to once per week, and its bankers’ acceptances purchases program to bi-weekly operations.

The Bank’s decision to hold the target for the overnight rate at its lower bound was mainly to support the economic recovery going forward. The Bank noted that the fall in economic output due to the pandemic has likely bottomed out, but uncertainty surrounding the recovery is still elevated. Therefore, the Bank will maintain the current amount of stimulus to ensure a smooth and robust recovery. On the price front, lower gasoline costs have weighed heavily on consumer prices in recent months with consumer price index falling year-on-year in April, but global oil markets are showing signs of stabilizing and prices are gradually recovering. Consequently, the Bank expects headline inflation to return in the coming months.

In terms of its asset purchasing since the start of the pandemic, the Bank noted, “programs to improve market function are having their intended effect. After significant strains in March, short-term funding conditions have improved.” Therefore, the BoC decided to scale back the frequency of some its market operations, but will continue to buy federal, provincial and corporate debt at its current scope and frequency.

Going forward, our panelists expect the Bank to keep the target for the overnight rate at its current level for the remainder of the year. Moreover, the Bank will likely uphold its asset purchasing programs to ensure economic and liquidity conditions continue to improve.

Commenting on June’s meeting, James Orlando, a senior economist at TD Economics, noted:

“The current shock will require a nimble hand and the Bank of Canada has maintained its commitment to do everything it can to help the economy get back to normal as fast as it can.”

The next meeting is scheduled for 15 July.

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