Bank of Canada keeps key interest rate on hold

Andrew Cummings
October 28, 2020

"The QE adjustment is about maximising the effectiveness of the program".

The central bank's updated estimates of potential growth - its best guess on how fast the economy can expand without putting too much upward pressure on inflation - show that the legacy of the pandemic will extend well into the future.

The Bank of Canada holds interest rate steady, predicts recovery by 2022.

"As the economy recuperates, it will continue to require extraordinary monetary policy support", the Bank of Canada said in a statement on October 28.

The projections for growth and inflation mark a return to the bank's usual practice of giving a longer view for the economy in its quarterly monetary policy report.

In its Monetary Policy report Wednesday, the Bank of Canada said household and corporate borrowing tend to be most closely linked to bond yields in the three to 15 year range, though Macklem said the central bank could also buy 30-year bonds under the program. "I think that underlines the importance of the income-support programs that the government has provided to protect the most vulnerable, and that has underpinned this recovery", Macklem said.

Knightley said the announcement that bond purchases will be scaled down should bode well for the BoC-Fed relative balance sheet, which rose dramatically as the BoC started QE but had already flattened up in the past couple of months.

Governor Tiff Macklem said their economic outlook is based on several assumptions, including a vaccine widely available by mid-2022 and no further widespread lockdowns.

The Bank of Canada says it has no plans to change its benchmark interest rate until inflation gets back to two per cent and stays there, something it says isn't likely to happen until 2023. Emergency federal aid has replaced lost wages for millions of workers, and provided loans and wage subsidies to struggling businesses.

The hardest-hit sectors, such as restaurants, travel and accommodations, continue to lag as the economy recuperates.

"The breadth and intensity of reimposed containment measures, including impacts on schools and the availability of child care, could lead to setbacks", the report says.

"This will leave the Bank being less heavy handed in the Government of Canada debt market", Royce Mendes, an economist at CIBC World Markets, said in a report to investors.

"In the longer term, the prospect of rates locked at the lower bound is hardly a game changer for CAD as the BoC does not particularly stand out as a dovish outlier in the G10 ultra-accommodative environment".

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