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Canada Monetary Policy September 2020

Canada: Bank of Canada keeps rates unchanged in September, continues with asset purchasing program

On 9 September, 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, which represents purchases of at least $5 billion of government bonds per week.

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 seems to be improving at a better-than-expected pace 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 relatively muted in recent months. Moreover, the Bank expects price pressures to “remain well below target in the near term”. Therefore, the BoC is committed to keeping its target for the overnight rate at its effective lower bound until the “economic slack is absorbed so that the 2 percent inflation target is sustainably achieved”.

In terms of its asset purchasing since the start of the pandemic, the Bank noted the QE program will continue at its current pace until “the recovery is well underway and [it] will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective”.

In its communiqué, the Bank stated that it stands 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.

Commenting on September’s meeting, analysts at Goldman Sachs noted:

“Overall, the cautious tone on the outlook, the unchanged guidance, and the possibility that the BoC will adopt flexible average inflation targeting support our view that the BoC will not hike rates through 2023.”

The next meeting is scheduled for 28 October.

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