This morning, the Bank of Canada left its target overnight benchmark rate – the main tool used by the BoC to conduct monetary policy – 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 was expected after the BoC lowered its target for the overnight rate 150 basis points in March.
However, the announcement was noteworthy in that it included some encouraging thoughts about financial conditions in Canada.
Comparing the Bank’s two most recent statements (today and April 15, 2020), we find several new comments on the global and Canadian economies:
- Incoming data “confirm” the severe impact of the COVID-19 pandemic on the global economy.
- This impact “appears to have peaked,” as “massive policy responses in advanced economies” have helped to replace lost income and cushion the effect of economic shutdowns.
- Financial conditions have improved, and commodity prices have risen in recent weeks after falling sharply earlier this year.
- A global recovery will “likely will be protracted and uneven” because “containment measures” used by different countries will be lifted at different times.
- In Canada, the pandemic has led to “historic losses in output and jobs” but our domestic economy appears to have “avoided the most severe scenario” presented in the Bank’s April Monetary Policy Report.
- Canada’s level of real GDP in the first quarter was 2.1 percent lower than in the fourth quarter of 2019, reflecting the combined impact of falling oil prices and widespread shutdowns.
- Canada’s real GDP in the second quarter will “likely show a further decline of 10-20 percent” – but this is an improvement over the Bank’s April forecast of a 15-30 percent decrease compared to Q4 2019.
- While the outlook for the second half of 2020 and beyond remains “heavily clouded,” the Bank expects the economy to resume growth in the third quarter.
Reducing Repo Activity
The BoC also noted that its programs to improve market function “are having their intended effect” as short-term funding conditions have improved. As such, it is now reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations. Policymakers, however, indicated that they stand ready to adjust these programs if market conditions warrant.
Meanwhile, the BoC’s other programs to purchase federal, provincial, and corporate debt are continuing at their present frequency and scope. In fact, the BoC made a point of saying that it will maintain its commitment to “large-scale asset purchases” until the economic recovery is well underway.
The Bank indicated that as market function improves and containment restrictions ease, its focus will shift to “supporting the resumption of growth in output and employment” and that any further policy actions will be “calibrated to provide the necessary degree of monetary policy accommodation required” to achieve its inflation target.
The Bank expects temporary factors to keep CPI inflation (which has decreased to near zero) below its target band in the near term. The Bank’s core measures of inflation are now between 1.6 and 2 percent.
BoC’s next scheduled policy announcement is July 15, 2020 and it will be the first made by the Bank under the leadership of its new Governor, Tiff Macklem who assumed the post today. In the meantime, First National will continue to do its part in supporting growth in Canada’s housing market through our market-leading single family and multi-family commercial lending operations.