Canada: Bank of Canada keeps rates unchanged in October, recalibrates asset purchasing program
October 28, 2020
On 28 October, 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 recalibrate its quantitative easing program by adjusting towards purchasing longer-term bonds and slightly reducing the amount of weekly purchases.
The Bank’s decision to hold the target for the overnight rate at its lower bound was mainly to support the economic recovery. The BoC noted that the economic situation had improved at a stronger-than-expected pace in Q3 since its July monetary policy report, but uncertainty surrounding the recovery remains elevated due to the unknown evolution of the virus domestically and globally. On the price front, low oil prices and tepid economic activity have kept inflation well below its 1.0–3.0% target range in recent months. Moreover, the Bank expects price pressures to stay below 1.0% until early next year, before likely rising but remaining below the midpoint of the target range throughout its current projection horizon. Therefore, 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 takes us into 2023.”
In terms of its quantitative easing program, the BoC decided to recalibrate its weekly bond purchases, reducing them from CAD 5 billion to CAD 4 billion. At the start of the pandemic, the Bank bought bonds with shorter-term maturities to provide quick liquidity and thus support financial conditions. Since then, financial markets have improved and short-term yield levels are well anchored around the Bank’s forward guidance. The Bank will now focus on purchases of longer-term bonds, which tend to provide more stimulus per dollar as they lower the borrowing rates most relevant for households and businesses. Consequently, the recalibration should provide at least as much stimulus as before, despite reducing the amount of buying.
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 October’s meeting, Sri Thanabalasingam, a senior economist at TD Economics, noted:
“Indeed, there's a long way to go for the Canadian economy to emerge out of this crisis. The path forward is filled with uncertainty, most of which could set the recovery back a step or two. The Bank will do its part in supporting the economy through this "recuperation" phase. With economic slack only expected to be fully absorbed in 2023, the Bank is set to continue to provide monetary support for many years to come.”
The next meeting is scheduled for 9 December.
Author: Steven Burke, Economist