Bank of Canada sees output gap and below 2% inflation through 2022, re-calibrates QE

Author: Adam Button | Category: Central Banks

Highlights of the Bank of Canada decision

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  • Holds rates at +0.25%, as expected
  • QE to buy more longer-dated bonds
  • Pace of QE to be gradually reduced to $4B week from $5B week
  • Repeats that QE will continue until recovery 'well underway'
  • Near-term activity to be affected negatively by measures taken to combat recent increase in infections
  • US growth "appears to be slowing considerably"
  • The recovery in Europe is slowing
  • China's recovery is broadening
  • Canadian economy is now transitioning to a more moderate recuperation phase
  • The Governing Council 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. In our current  projection, this does not happen until into 2023
At the current pace, the Bank of Canada will hold half of the government of Canada debt by year end. Gradually reducing the pace to $4B is going to have little effect on that.

Despite the drop in the (insane) pace of QE, this is largely a dovish statement as it highlights mostly downside risks and offers no sign of QE slowing down. There was some talk of YCC but that hasn't come to pass and there's no hint of it here. They also talk about 0.25% as the effective lower bound, which continues to rule out negative rates.

Full statement:

Bank of Canada will maintain current level of  policy rate until inflation objective is achieved, recalibrates its  quantitative easing program


The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program. The Bank is recalibrating the QE program to shift purchases towards longer-term bonds, which have more direct influence on the borrowing rates that are most important for households and businesses. At the same time, total purchases will be gradually reduced to at least $4 billion a week. The Governing Council judges that, with these combined adjustments, the QE program is providing at least as much monetary stimulus as before.

The global and Canadian economic outlooks have evolved largely as anticipated in the July Monetary Policy Report (MPR), with rapid expansions as economies reopened giving way to slower growth, despite considerable remaining excess capacity. Looking ahead, rising COVID-19 infections are likely to weigh on the economic outlook in many countries, and growth will continue to rely heavily on policy support.

In the United States, GDP growth rebounded strongly but appears to be slowing considerably. China's economic output is back to pre-pandemic levels and its recovery continues to broaden. Emerging-market economies have been hit harder, especially those with severe outbreaks. The recovery in Europe is slowing amid mounting lockdowns. Overall, global GDP is projected to contract by about 4 percent in 2020 before growing by just over 4 ½ percent, on average, in 2021-22.

Oil prices remain about 30 percent below pre-pandemic levels. Meanwhile, non-energy commodity prices, on average, have more than fully recovered. Despite continued low oil prices, the Canadian dollar has appreciated since July, largely reflecting a broad-based depreciation of the US dollar. 

In Canada, the rebound in employment and GDP was stronger than expected as the economy reopened through the summer. The economy is now transitioning to a more moderate recuperation phase. In the fourth quarter, growth is expected to slow markedly, due in part to rising COVID-19 case numbers. The economic effects of the pandemic are highly uneven across sectors and are particularly affecting low-income workers. Recognizing these challenges, governments have extended and modified business and income support programs.

After a decline of about 5 ½ percent in 2020, the Bank expects Canada's economy to grow by almost 4 percent on average in 2021 and 2022. Growth will likely be choppy as domestic demand is influenced by the evolution of the virus and its impact on consumer and business confidence. Considering the likely long-lasting effects of the pandemic, the Bank has revised down its estimate of Canada's potential growth over the projection horizon.

CPI inflation was at 0.5 percent in September and is expected to stay below the Bank's target band of 1 to 3 percent until early 2021, largely due to low energy prices. Measures of core inflation are all below 2 percent, consistent with an economy where demand has fallen by more than supply. Inflation is expected to remain below target throughout the projection horizon.

As the economy recuperates, it will continue to require extraordinary monetary policy support. The Governing Council 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. In our current projection, this does not happen until into 2023. The Bank is continuing its QE program and recalibrating it as described above. The program will continue until the recovery is well underway. We are committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.



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