Bank of Canada Left Overnight Interest Rate Target at 0.25%

October 28, 2020

Three 50-basis point interest rate cuts to an effective floor of 0.25% were implemented by Canadian central bank officials during March, and they continue to affirm that the rate will not be raised until “economic slack is absorbed so that the 2% inflation target is sustainably achieved.” Current projections do not anticipate that happening until sometime in 2023.

Two adjustments to the existing quantitative easing program were unveiled today, which officials on the Governing Council believe will continue “providing at least as much monetary stimulus as before.” On the one hand, weekly asset purchases are being reduced by CDLR 1 billion to at least C$ 4.0 billion. On the other, purchases will henceforth be skewed toward longer-term bonds because these “have more direct influence on the borrowing rates that are most important for households and businesses.” Officials intend to maintain quantitative easing “until the recovery is well underway,” according to today’s policy statement.

The policy statement was accompanied by a lengthier Monetary Policy Report, which officials update quarterly. Numerical forecasts in the MPR have been revised rather sharply from the previous July edition. Canadian real GDP is projected to drop this year by 5.7%, not 7.8%, and then it will increase 4.2% in 2021 and 3.7% in 2022, which are smaller gains than imagined before. As of last quarter, productive slack in the economy had soared to 3-4%, and this negative output is not expected to be reabsorbed until some point during 2023. Meantime, inflation will therefore remain very subdued, with projected on-year consumer price increases projected at 0.2% this quarter, 1.3% in the final quarter of 2021, and 1.8% a year after that. Only in 2023 would inflation ascend to the 1-3% target midpoint.

Other MPR highlights are significantly weaker estimated potential non-inflationary GDP growth, an admission that Canada’s economic recovery began sooner and progressed more strongly last quarter than had been anticipated, and a prediction that Covid-19 vaccines and treatments will not become widely available until the middle of 2022. Note is also made that Europe is seeing a second wave of the virus. Real GDP in the euro area is expected to contract in 2020 much faster (-8%) than GDP in the U.S. (-3.6%) or even Japan (-5.7). Emerging market economies continue to struggle in many cases, and the recuperation of commodity prices has been uneven. But interestingly, China’s output is already back at pre-pandemic levels. Fourth-quarter growth already exhibits a slowdown in many countries, including Canada, due to the relentless threat of the coronavirus. Finally, Canadian monetary officials estimate that a neutral Canadian interest rate level — one that neither promotes nor depresses economic growth — lies between 1.75% and 2.75%, which is two full percentage points above its current level.

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




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