This morning, the Bank of Canada left its target overnight benchmark rate unchanged at what it previously described as its “lower bound” of ¼ percent. As a result, the Bank Rate remains at ½ percent.
This decision comes as no surprise as the central bank has indicated that is it has no intention of raising rates until “economic slack is absorbed” so that its 2 percent inflation target is “sustainably achieved.”
However, this announcement was noteworthy in another way: the Bank updated its assessment of the Canadian economy and repeated its pledge to continue its Quantitative Easing (“QE”) policy which sees it purchase at least $5 billion of Government of Canada Bonds every week.
Here are some of the Bank’s observations we found most revealing:
- As the Canadian economy reopens from COVID-19 lockdown conditions, the bounce-back in activity in the third quarter “looks to be faster than anticipated in July.”
- Household spending rebounded sharply over the summer, with stronger-than-expected goods consumption and housing activity “largely reflecting pent-up demand.”
- There has been a “large but uneven” rebound in employment.
- Prices for some commodities have firmed, but oil prices remain weak.
- CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below the Bank’s target in the near term.
- Measures of core inflation are between 1.3 percent and 1.9 percent, reflecting the large degree of economic slack.
- Global financial conditions have remained “accommodative” and “core funding markets” are functioning well, which has led to a decline in the use of the Bank’s short-term liquidity programs.
- The rebound in the United States has been stronger than expected.
- Exports are recovering in response to strengthening foreign demand but are still “well below” pre-pandemic levels.
- While recent data during the reopening phase of the economy are “encouraging,” the Bank continues to expect the recuperation phase to be “slow and choppy” as the economy copes with “ongoing uncertainty and structural challenges.”
It is evident that monetary policy is working to support household spending and business investment by making borrowing more affordable. This provides the silver lining to an otherwise difficult economic backdrop that has included, in the words of the Bank of Canada “subdued” business confidence.
Since the Bank believes the current “strong reopening phase” of the economic cycle will be followed by a “protracted and uneven recuperation phase,” it has pledged to hold its policy interest rate at the effective lower bound.
To reinforce this commitment and keep interest rates low across the yield curve, the Bank pledged to continue its large-scale asset purchase program at the current pace. This QE program will remain in place until the recovery is well underway and will be “calibrated” to provide the monetary policy “stimulus needed to support the recovery.” (Of note, the Bank’s message on QE changed slighted from July when it said it “stands ready to add further stimulus as needed.” Could this shift in wording telegraph that changes in its QE program are planned? We’ll have to wait and see.)
In summary, the pace of the economic recovery remains highly dependent on the path of COVID-19 and the “evolution” of measures required to contain its spread. It is of course impossible to predict the course of the pandemic, but it is reassuring to see the Bank of Canada standing fast on its accommodative monetary policy.
BoC’s next scheduled policy announcement is October 28, 2020. In the meantime, First National will continue to do its part in contributing to your growth and the resurgence of the Canadian economy through our market-leading single family and multi-family commercial lending operations.