• The Bank of Canada left its policy interest rate unchanged at 0.25% this morning. Asset purchases will continue at their current settings, including minimum purchases of $5bn/week of Government of Canada bonds. The statement accompanying these decisions provided a bit of forward guidance, stating that they will “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”
  • A similar commitment was provided around their asset purchases. Indeed, these, along with liquidity measures have driven a significant expansion of the Bank of Canada’s balance sheet. As of a week ago, it stood at more than $500bn, or nearly 25% of Canadian GDP. These purchases will absorb a significant portion of this year’s budget deficit outlined in last week’s Federal Fiscal Snapshot.
  • Today’s rate decision also came with a new Monetary Policy Report (MPR), with this one bringing numeric forecasts (a “central scenario”), albeit only for the ‘top line’ of GDP. The Bank of Canada has a fairly conservative forecast, with GDP expected contract 7.8% this year, followed by a return to growth, forecasting 5.1% and 3.7% expansions in 2021 and 2022 respectively. Behind this outlook are a number of key assumptions, notably that there will be no significant second wave of the pandemic in Canada, most containment measures will be gradually lifted, and the pandemic will have largely run its course by mid-2022.
  • Similar to our view, the Bank of Canada sees some portion of output being permanently lost, with their central scenario assuming that roughly 60% of the impact on GDP in the first half of this year has fed through to supply. This leaves a persistent gap versus their earlier projections that persists through the end of 2022: even as supply (or, put differently, the economy’s underlying potential) recovers, helped by monetary stimulus, it never regains its prior level.
  • The MPR also contained a sizeable discussion of inflation. On one hand, the shock has clearly been disinflationary, sending the Bank of Canada’s core inflation measures down to the 1.4% to 1.9% range, and it is expected to be some time before inflation returns to the 2% target on a sustainable basis. Conversely, the Bank also found that the headline CPI may be understating experienced inflation by as much as 0.3 percentage points as household spending patterns have shifted dramatically during pandemic lockdowns.
  • In place of the typical listing of risks, the MPR provided a rundown of alternate scenarios and risks. On the downside, a second wave of the virus, more severe than the first, would have clearly negative impacts. Another risk is that global financial conditions tighten in the wake of “widespread” household, corporate, and sovereign defaults given current high debt levels. Conversely, the rapid development of a vaccine or effective treatment would clearly deliver a better economic outcome than the Bank of Canada’s central scenario.

Key Implications

  • No surprises here. With uncertainty still extremely elevated, the Bank of Canada is not taking any chances, maintaining stimulus, and reminding us again that they can and will do more to support the economy if needed.
  • We can expect much of this stimulus to remain in place for some time. The combination of a commitment to keep the overnight rate at its current level until economic slack is absorbed, together with their forecast that this won’t happen until as late as 2023, speaks volumes. Given the economic damage already done by the pandemic and the uncertain path forward, this is an institution clearly set to stay in repair mode for some time.


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