Bank of Canada Reduces Pace of Bond Purchases and Adjusts Forward Guidance Slightly

April 21, 2021

As expected, Canada’s overnight interest rate target, which has been 0.25% since a trio of half-percentage point cuts in March 2020, was left unchanged. However, the targeted weekly amount of quantitative stimulus was lowered from “at least 4 billion” to $3 billion, according to a released statement.

Governing Council members assert a continuing need for “extraordinary monetary policy support” and pledge not to lift the overnight interest rate target until “economic slack is absorbed so that the 2% inflation target is sustainably achieved. However, they now think that condition is apt to be met during the second half of 2022 rather than sometime in 2023, so forward guidance has thus been implicitly modified.

The reason for these changes is greater economic growth recently than assumed previously. Canadian real GDP soared 40.6% at an annualized rate between 2Q 2020 and the third quarter, then climbed 9.6% in 4Q, twice their prior expectation. Signs points to growth of about 7.0% at an annualized rate in the first quarter of 2021 and, according to a new quarterly Monetary Policy Report, projected growth for 2021 as a whole has been revised upward to 6.5% from 4.0% projected in January’s MPR.

With the rate of non-inflationary potential GDP growth averaging 1.6% per year in 2021-23, officials estimate that Canada’s output gap, a measure of spare capacity, fell from a range of -4.5% to -3.25% in 4Q 2020 to -3.0% to -2.0% last quarter. Base effects and higher oil prices have meanwhile lifted CPI inflation, which is expected to crest close to 3.0% in mid-2021, but monetary policy is focused on likely medium-term inflation. The 12-month rate of CPI increase will settled back toward 2.0% during the second half of this year and is projected at 1.9% next year and 2.3% in 2023.

While Canada’s economy has experienced more resilience amid the continuing pandemic that was expected, Officials observe that Canada has not been immune from a difficult third wave currently, and additional uncertainty stems from the emergence of “more contagious Covid-19 variants.” Ultimately, monetary policy will be guided in the future by the evolution of slack, and “the Bank will look at a broad spectrum of indicators, including various measures of labor market conditions.”

The latest MPR has revised upward projections of global and U.S. GDP growth. Global GDP is forecast to increase 6.8% this year followed by 4.1% in 2022 and 3.3% in 2023. U.S. GDP is seen rising 7.0% in 2021, then 4.1% in 2022 but just 1.3% in 2023. In China, GDP growth of 9.5% assumed this year drops back to 5.3% in both 2022 and 2023. Growth lags in Japan (3.0% in 2021 and 1.3% in 2022) and the European Union (4.5% this year).

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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