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Zero Hedge : Bank Of Canada Keeps Rates Unchanged, Sees GDP Returning To Normal By 2022

July 15th, 2020 | by Richard Paul
Zero Hedge : Bank Of Canada Keeps Rates Unchanged, Sees GDP Returning To Normal By 2022
Business and Finance


Bank Of Canada Keeps Rates Unchanged, Sees GDP Returning To Normal By 2022

The Bank of Canada did not surprise markets moments ago when it kept its target for the overnight rate at the effective lower bound of 0.25% as expected.

The Bank also said it would continue its quantitative easing program, with asset purchases of at least $5 billion per week of Canadian Government  bonds, and added that the Bank’s short-term liquidity programs announced since March to improve market functioning are having their intended effect and, with reduced market strains, their use has declined. Additionally, the provincial and corporate bond purchase programs will continue as announced, and the BOC said that it stands ready to adjust its programs if market conditions warrant.

Noting that while economies are re-opening, “the global and Canadian outlook is extremely uncertain, given the unpredictability of the course of the COVID-19 pandemic” and reflecting this, the Bank’s July Monetary Policy Report (MPR) presented a central scenario for global and Canadian growth rather than the usual economic projectionsThe central scenario is based on assumptions outlined in the MPR, including that there is no widespread second wave of the virus.

Some more details from the BOC’s July Monetary Policy Report:

  • The Bank of Canada indicated that markets “generally interpret” the presence of quantitative easing as a sign rates will be a the lower bound for an “extended period”.
  • “Markets generally interpret QE as a signal that rates will likely be at the lower bound for an extended period (signalling channel)”
  • GDP growth -8.2% q/q SAAR in 1Q, -43% q/q in 2Q and +31.3% q/q in 3Q
  • “The Bank has committed to continue buying at least C$5 billion of Canadian government bonds each week until the recovery is well underway”
  • Bank of Canada introduces “central scenario” estimate on economy, notes considerable risk to forecast
  • “The Bank of Canada expects a sharp rebound in economic activity in the reopening phase of the recovery, followed by a more prolonged recuperation phase, which will be uneven across regions and sectors”
  • “The economy has thus far avoided the most severe scenarios presented in the April Report, but considerable economic slack remains”
  • “Household spending picks up gradually as containment measures are eventually lifted and confidence in the economy improves”
  • “Uncertainty about the composition and strength of future demand, elevated debt levels and lingering financial stress significantly dampen business investment”
  • “Exports in the central scenario recover gradually as borders reopen further, international supply chains are re-established and foreign demand picks up”

In the BOC’s central scenario, it sees the level of real GDP returning to 2019, pre-Covid levels by 2022:

  • “The central scenario assumes the neutral rate is 2.5 percent”
  • “Large-scale secondary market purchases of Government of Canada bonds provide monetary stimulus through several channels and can be described as quantitative easing (QE)”
  • “Effects of the downturn and lower immigration hold down housing activity over the next few years”
  • “Gap between demand and supply of roughly 6 to 7 percent in the second quarter”
  • “The level of potential output by 2022 in the central scenario is almost 4 percent lower than in the January Report”

Despite the lack of official projections, the central bank sounded optimistic, saying that there are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output. In the central scenario, roughly 40% of the collapse in the first half of the year is made up in the third quarter. Subsequently, the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges. As a result, in the central scenario, real GDP declines by 7.8 percent in 2020 and resumes with growth of 5.1 percent in 2021 and 3.7 percent in 2022. The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures.

That said, looking ahead, the BOC said that as the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support, and “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 addition, to reinforce this commitment and keep interest rates low across the yield curve, the Bank is continuing its large-scale asset purchase program at a pace of at least $5 billion per week of Government of Canada bonds. This QE program is making borrowing more affordable for households and businesses and will continue until the recovery is well underway. To support the recovery and achieve the inflation objective, the Bank is prepared to provide further monetary stimulus as needed.

After a modest kneejerk move in either direction, the USDCAD was largely unchanged after the widely expected announcement, trading in the same tight range it has been in for the past month.

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