This morning, the Bank of Canada left its target overnight benchmark rate unchanged at what it describes as its “lower bound” of ¼ percent. As a result, the Bank Rate remains at ½ percent.
This decision was expected and is therefore not newsworthy. What is newsworthy is the Bank’s announcement that it will hold its policy interest rate at the lower bound until economic slack is absorbed. In its current projection, the Bank does not expect this to happen until into 2023.
Assuming inflation does not rise to 2% on a sustainable basis, this could mean several more years of low borrowing rates.
The Bank also updated its commentary on the current state of the Canadian economy and as noted below, announced a shift in its quantitative easing (QE) program.
Here are some of the Bank’s observations we found most revealing:
- Through the summer, the rebound in employment and GDP in Canada was stronger than expected as the economy reopened
- After rapid expansions, the Canadian and global economies have “given way to slower growth” as anticipated and “despite considerable remaining excess capacity”
- The economy is now transitioning to a “more moderate recuperation phase”
- After a decline of about 5 ½ percent in 2020, the Bank expects Canada’s economy to grow by almost 4 percent on average in 2021 and 2022
- Growth will likely be “choppy as domestic demand is influenced by the evolution of the virus” and its impact on consumer and business confidence
- Rising COVID-19 infections are likely to weigh on the economic outlook in many countries, and growth will continue to “rely heavily on policy support”
- Considering the “likely long-lasting effects of the pandemic,” the Bank has revised down its estimate of Canada’s potential growth over its projection horizon
- Global GDP is projected to contract by about 4 percent in 2020
- The economic effects of the pandemic are “highly uneven across sectors” and this has been recognized by governments which have extended and modified business and income support programs
- Oil prices remain about 30 percent below pre-pandemic levels while non-energy commodity prices, on average, have “more than fully recovered”
- CPI inflation was at 0.5 percent in September and is expected to stay below the Bank’s target band of 1 to 3 percent until early 2021, largely due to low energy prices
- Measures of core inflation are all below 2 percent, consistent with an economy where “demand has fallen by more than supply.”
- Inflation is expected to remain below target throughout the projection horizon.
- The Canadian dollar has appreciated since July, largely reflecting a broad-based depreciation of the US dollar
Change in Quantitative Easing Program
While the Bank is maintaining what it calls its “extraordinary forward guidance,” which is reinforced by its QE program, it also announced today that it is recalibrating the program. This will see the Bank shift purchases towards longer-term bonds, which have more direct influence on the borrowing rates that are most important for households and businesses.
At the same time, total purchases will be gradually reduced to at least $4 billion a week from the recent levels of approximately $5 billion. The Governing Council believes that with these combined adjustments, the QE program will provide “at least as much monetary stimulus as before.”
During the news conference today that accompanied the release of the Bank’s Monetary Policy Report, the Bank said its main message is that it will take “quite some time for the economy to fully recover from the COVID-19 pandemic, and the Bank of Canada will keep providing monetary stimulus to support the economy through the recovery.”
While the future is never possible to predict – not even by the Bank of Canada – the BoC has made certain assumptions to arrive at its current position, including that authorities won’t need to reinstate widespread containment measures we saw in the spring and that “vaccines and effective treatments” will be widely available by the middle of 2022.
BoC also expects fourth-quarter growth to be “just barely positive —weaker than previously expected due to the resurgence in COVID-19 infections.”
However, as noted above, the Bank expects Canada’s economy to grow by almost 4 percent on average in both 2021 and 2022.
BoC’s next scheduled policy announcement is December 9, 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 residential and commercial lending operations.