Bank of Canada Retains Effective 0.25% Policy Rate Floor and Pledges Continuing Canadian Government Bond Purchases

September 9, 2020

Canada’s overnight interest rates was cut by 50 basis points on three occasions during March to what central bank officials consider an “effective lower bound” of 0.25%. A statement released after this month’s policy review reaffirms the promise to begin raising the short-term interest rate “until economic slack is absorbed so that the 2 percent inflation target is sustainably
achieved.” In the latest reported month of July, total CPI was a mere 0.1%, and measures of core inflation ranged from 1.3% to 1.9%. The statement concedes that activity in the third quarter of 2020 seems to have bounced back faster than anticipated at the start of the period, but officials continue to believe that the post-3Q recuperative phase of the recovery will “be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.”

The continuing requirement for “extraordinary monetary policy support” mandates continuing large-scale asset purchases at the current pace of “at least Cdlr 5 billion per week,” and the QE program “will continue until the recovery is well underway and will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective.” The next policy review is scheduled October 28, 2020 and will be accompanied by a new quarterly Monetary Policy Report with updated growth and inflation forecasts.

A sentence deleted in today’s statement that was included in the prior one had warned that the “Bank is prepared to provide further monetary stimulus as needed.” Aside from getting faster third-quarter growth than assumed, the Canadian dollar is 3% stronger now than then against its U.S. counterpart and also 11.4% above its mid-March 2020 low. All other things being the same, C-dollar appreciation tends to tighten monetary conditions in Canada. The 2020 year-to-date Canadian dollar average value of 1.3565 per U.S. dollar is actually 2.2% softer than the 2019 mean, so the exchange rate is not a pressing policy consideration at the present time.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission. 

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