- The Bank of Canada left the overnight rate unchanged today at 0.25%. It also maintained its extraordinary forward guidance of its holding policy rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. The Bank said that according to its January projection, this would not happen until sometime in 2023.
- In terms of the quantitative easing (QE) program, the Bank opted to keep it running at $4 billion per week. However, today’s statement noted that as the Governing Council gains confidence in the strength of the recovery, it will adjust the pace of government bond purchases.
Key Implications
- The Bank of Canada stuck to the January script today, maintaining the current level of monetary support through to April. This decision came even as recent data blew the Bank’s near-term forecast out of the water. Canadian real GDP rose 9.6% in the fourth quarter of last year, double what the Bank had estimated in the January Monetary Policy Report (MPR). The first quarter of this year is also shaping out to be far stronger than the 2.5% contraction the Bank had embedded in its January forecast.
- To be fair, the Bank did acknowledge the resilience shown by the Canadian economy in today’s statement, but it wasn’t enough to force its hand. There are good reasons for this. One, a more resilient Canadian economy implies less scarring from the pandemic, which suggests growth can be stronger without becoming inflationary. This offers room for the Bank to maintain monetary stimulus at its current level. Two, even while some areas of the economy are outperforming, others are struggling. Over 500,000 workers have been unemployed for 27 weeks or more, and until these Canadians find new opportunities, inflationary pressures are likely to be modest.
- Next month’s MPR will offer a deeper dive into the central bank’s thinking. Typically, the report will include a re-assessment of potential output, providing more clarity on the Bank’s estimate of how the economy is performing relative to capacity and how much “economic slack” remains. It will also include additional data points to assess the overall strength of Canada’s recovery. If data continue to provide upside surprises and the vaccine rollout accelerates, the Bank may be left with little choice but to exit easy monetary policy sooner rather than later.
