Bank of Canada Holds On Key Overnight Lending Rate and Continues With Large Scale Asset Purchases

Earlier today, the Bank of Canada (BoC) made its eighth interest rate decision of the year. In a normal year there are eight interest rate announcements in total but this is far from a normal year, and there will likely be ten announcements. The news is generally positive, considering we are in the midst of a pandemic,.

The BoC is keeping its overnight rate at a low 0.25 percent and as a result, the cost to borrow will remain extraordinarily low for homebuyers.

Their announcement came with no surprise as the BoC has indicated that is it has no desire in raising rates until “economic slack is absorbed” so that its 2 percent inflation target is “sustainably achieved.”

Of note; the BoC updated its assessment of the Canadian economy and repeated its promise to continue its Quantitative Easing (“QE”) policy which anticipates it purchasing at least $5 billion of Government of Canada Bonds every week.

These are some of the BoC’s most salient observations:

1.) As the Canadian economy reopens from COVID-19 lockdown conditions, the bounce-back in activity in the third quarter “looks to be faster than anticipated in July.”
2.) There has been a “large but uneven” rebound in employment.
3.) Prices for some commodities have firmed, but oil prices remain weak.
4.) The rebound in the United States has been stronger than expected.
5.) Household spending rebounded sharply over the summer, with stronger-than-expected goods consumption and housing activity “largely reflecting pent-up demand.”
6.) CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below the Bank’s target in the near term.
7.) Measures of core inflation are between 1.3 percent and 1.9 percent, reflecting the large degree of economic capacity available.
8.) Exports are recovering in response but are still “well below” pre-pandemic levels.

While recent data during the reopening phase of the economy are “encouraging,” the BoC continues to expect the recovery phase to be “slow and choppy” as the economy deals with “ongoing uncertainty and structural challenges.”

It appears that monetary policy is working to support household spending and business investment by ensuring borrowing remains more affordable. This provides the silver lining to an otherwise difficult economic backdrop that has included, “subdued” business confidence per BoC.

Since the Bank believes the current “strong reopening phase” of the economic cycle will be followed by a “protracted and uneven recuperation phase,” it has pledged to hold its policy interest rate at the effective lower bound.

To reinforce this commitment and keep interest rates low across the yield curve, the BoC pledged to continue its large-scale asset purchase program at the current pace. Effectively increasing the money supply, this QE program will remain in place until the recovery is well underway and will be “calibrated” to provide the monetary policy “stimulus needed to support the recovery.”

In summary, it is reassuring to see the Bank of Canada standing fast on its accommodative monetary policy with the covid pandemic lingering.

BoC’s next scheduled policy announcement is October 28, 2020.