BOC announced to leave the policy rate at the effective lower bound of 0.25% and maintain the pace of asset purchases at CAD 5B/week of Canadian government bonds. While acknowledging that economic activities have rebounded more than expected since the July meeting, the members remained cautious about the outlook, especially on subdued inflation. On the monetary policy outlook, BOC reiterated to “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved”.
As suggested in the statement, the central bank noted that “household spending rebounded sharply over the summer, with stronger-than-expected goods consumption and housing activity largely reflecting pent-up demand”. It also acknowledged the “large”, albeit “uneven” rebound in employment. Exports also recovered as a result of “strengthening foreign demand, but are still well below pre-pandemic levels”. Yet, “business confidence and investment remain subdued”. BOC indicated that “the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenge”. Inflation has remained weak, and is expected “to remain well below target in the near term”. All BOC’s core inflation gauges pointed to “the large degree of economic slack” with “services prices showing the weakest growth”.
On the monetary policy stance, BOC reiterated its forward guidance, pledging to keep the policy rate at 0.25% “until economic slack is absorbed so that the 2% inflation target is sustainably achieved”. It also reaffirmed that QE “will continue until the recovery is well underway”. There was only mild adjustment in the concluding paragraph with BOC suggesting that it “will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective”. This is compared with July’s reference that “To support the recovery and achieve the inflation objective, the Bank is prepared to provide further monetary stimulus as needed”. We interpret this tweak as an indication that BOC could change the size of asset purchases in both directions. It could increase buying if the outlook worsens and decrease as the outlook strengthens.