• The Bank of Canada kept its key policy interest rate unchanged at 0.25%. However, the Bank did move to “recalibrate” the quantitative easing (QE) program by orienting purchases towards longer-term bonds, which have a more direct impact on households and businesses. Moreover, overall purchases will be gradually reduced to at least $4bn/week.
  • The Bank provided more explicit forward guidance. The policy interest rate will be held at the current level until economic slack is absorbed and the 2 percent inflation target is sustainably achieved. The Bank does not expect this to happen until sometime in 2023. The QE program will continue well into the recovery but recalibrated as the Bank sees fit.
  • Along with today’s decision, the Bank released its Monetary Policy Report (MPR). Unlike the July MPR, the October publication included a fully-fleshed out economic outlook. The Canadian economy has come in stronger than what the Bank had expected in its July report, but the recent surge in cases likely means a more protracted recuperation phase. As such, the Bank of Canada revised up the forecast for this year to -5.7% from -7.8%, weakened 2021 to 4.2% from 5.1%, and kept 2022 unchanged at 3.7%. These changes move the Bank’s forecast more in line with our own (see forecast). Underlying this outlook are the assumptions that we will not see extensive lockdown measures as experienced earlier this year, and that vaccines and effective treatments are widely-available by mid-2022. However, households will continue to be cautious even after the pandemic has ended.
  • The September MPR included a full reassessment of Canada’s economic potential. Understanding the magnitude of the long-lasting negative supply side shocks of the pandemic (i.e. weaker capital investment, and labour market scarring), the Bank sharply revised down potential output growth from around 1.8% to 1.2% in 2022 and 2023. In addition, the neutral rate was revised down from the range of 2.25%-3.25% to 1.75%-2.75%.
  • Despite the downward revision in supply, the Bank expects economic slack to persist out to 2023. As a result, inflation is anticipated to remain below the target range of 1 to 3 percent until early 2021, before gradually moving up to 1.7% in 2022.

Key Implications

  • The Bank continued to tinker with the asset purchase program today, reducing the magnitude of purchases but also shifting concentration towards longer term bonds (which provides more stimulus than short term).  The Bank stressed that these influences are largely offsetting, implying no change from its recent dovish stance.
  • Caution remains warranted given the looming downside risks posed by COVID-19. The recent surge in infections led to a downward revision in 2021, and the overall impact of the pandemic has contributed to a steep markdown of Canada’s economic capacity in the medium term.
  • Indeed, there’s a long way to go for the Canadian economy to emerge out of this crisis. The path forward is filled with uncertainty, most of which could set the recovery back a step or two. The Bank will do its part in supporting the economy through this “recuperation” phase. With economic slack only expected to be fully absorbed in 2023, the Bank is set to continue to provide monetary support for many years to come.

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