Bank of Canada Kept at 0..25% Effective Floor and Substantial Quantitative Stimulus to Continue

July 15, 2020

Canada’s overnight central bank rate target was sliced three times by 50 basis points each time during March. At 0.25%, such is now at a level that officials believe to be at an effective lower boundary. In addition, monetary officials have implemented a range of liquidity facilities and asset purchase programs to ease market dysfunctionality and thus support the expansive intent of monetary policy. The fifth scheduled policy review of 2020 released a statement that reaffirms the Governing Council’s intent not to raise interest rates “until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved…. Quantitative easing will continue until the recovery is well underway.”

Macroeconomic forecasts were updated and incorporated into the quarterly Monetary Policy Report also released today. Global GDP is expected to drop 5.2% on average in 2020, rise 5.2% in 2021 and then advance 5.4% in 2022. Canada’s baseline forecast, which as in the forecasts of other central banks explicitly assumes no second wave of Covid-19, has Canadian real GDP falling 7.8% on average this year before rising 5.1% in 2021 and 5.7% in 2022. Canada’s output gap — the difference between output and demand — was considered to be a very substantial 6-7% last quarter, the attainment of pre-Covid levels of activity is not expected until the end of next year.

Inflation in Canada will stay excessively low for some time longer. A major assumption is that during Canada’s recuperative stage beyond the initial opening, aggregate demand will expand more slowly than supply. Consumption will continue to be suppressed by the need for physical distancing and weakened confidence, while indebtedness and elevated uncertainty depress business spending. Total inflation is now hovering near zero percent and projected to average 0.6% this year, followed by 1.2% in 2021 and 1.7% in 2022. Regarding the persistence of uncertainty, officials have this to say.

The large declines in both demand and supply are extraordinary.
Over a longer horizon, the pandemic could cause large and lasting changes
in consumer preferences and other sources of demand. Similarly, the scope
of possible structural changes to a post-pandemic economy is vast, and
the timing of adjustments will remain unknowable as long as COVID-19
continues to be a threat.

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



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