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Bank of Canada Keeps Overnight Rate at Effective Lower Bound and Maintains QE Program 

The Bank of Canada (BoC) opted to keep the overnight rate at 0.25%, while also maintaining the quantitative easing (QE) program to at least $2 billion of asset purchases per week.

The Bank reiterated that the interest rate would remain at its effective lower bound until economic slack is absorbed and the 2% inflation target is sustainably achieved, which, according to its July projection, would occur in the second half of 2022.

With regards to the recent disappointing second quarter GDP data, the Bank said that while overall output contracted by about 1%, domestic demand grew by more than 3%. In addition, employment rebounded in June and July. As a result, the Bank continues to expect the recovery to strengthen in the second half of the year, although the Delta variant and supply chain disruptions could weaken growth in the fourth quarter.

On inflation, the Bank noted that CPI inflation is above 3%, as it had expected. However, it still sees transitory factors such base-year effects, gasoline prices, and supply bottlenecks as the main drivers of price growth, and as they fade, for inflation to moderate.

Key Implications

The Bank of Canada maintained its monetary policy stance today stating that even though the recovery lost a bit of steam in the second quarter, the ingredients are there for economic activity to strengthen through the remainder of the year. While the Delta variant could complicate matters, the Bank, like us, do not expect the virus to blow the recovery off course in the fourth quarter.

The Bank will be paying close attention to the upcoming employment and inflation releases. A solid gain in jobs in August alongside a tempering of price pressures should leave the Bank on track to gradually reduce monetary stimulus in coming quarters. However, if the employment report disappoints or inflation picks up further, the Bank’s Governing Council will face a more difficult trade off. Boosting monetary stimulus could further aid the recovery, especially given the Delta variant risk, but runs the risk of accelerating price growth. With hiccups almost certain to come in one form or another, clear central bank communication will be required to carefully guide the economy to the other side of this pandemic.

TD Bank Financial Group
TD Bank Financial Grouphttp://www.td.com/economics/
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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