Bank of Canada to maintain current policy rate until inflation target is met, quantitative easing program continues


The Bank of Canada today maintained its overnight rate target at the effective ¼ percent lower limit. The discount rate is therefore ½ per cent and the deposit rate is ¼ per cent. The Bank is also continuing its quantitative easing (QE) program, with large-scale asset purchases of at least $ 5 billion a week in Government of Canada bonds. The Bank’s short-term liquidity programs announced since March to improve the functioning of the market are having the expected effect and, with reduced market tensions, their use has decreased. Provincial and corporate bond purchase programs will continue as announced. The Bank is ready to adjust its programs if market conditions warrant.
As economies reopen, the global and Canadian prospects are extremely uncertain, given the unpredictability of the course of the COVID-19 pandemic. Reflecting this, the Bank of July Monetary policy report (MPR) presents a central scenario for global and Canadian growth rather than the usual economic projections. The central scenario is based on assumptions described in the RPM, notably that there is no generalized second wave of the virus.
After a sharp decline in the first half of 2020, global economic activity is picking up. This return to growth reflects the relaxation of the necessary containment measures put in place to slow the spread of the coronavirus, combined with extraordinary budgetary and monetary support. As a result, financial conditions have improved. Prices for most commodities, including petroleum, fell from very low levels. In the central scenario, the global economy shrinks by around 5% in 2020, then grows by around 5% on average in 2021 and 2022. The timing and pace of the recovery varies by region and could be hampered by a resurgence of infections and the limited ability of some countries to contain the virus or support their economies.
The Canadian economy is starting to recover as it reopens after the closings necessary to limit the spread of the virus. With economic activity in the second quarter estimated at 15% below its level at the end of 2019, this is the biggest drop in economic activity since the Great Depression, but considerably less severe than the worst scenarios presented. in the April MPR. Decisive and necessary fiscal and monetary policy measures have supported incomes and kept credit flowing, cushioning the fall and laying the foundation for the recovery. Since early June, the government has announced additional support programs and extended others.
Warning signs indicate that the reopening of businesses and pent-up demand are leading to a first rebound in employment and production. In the central scenario, around 40% of the collapse in the first half of the year is made up in the third quarter. Subsequently, the Bank expects the economic recovery to slow as the pandemic continues to affect consumer confidence and behavior and the economy is experiencing structural challenges. As a result, in the central scenario, real GDP decreases by 7.8% in 2020 and resumes with growth of 5.1% in 2021 and 3.7% in 2022. The Bank expects the slowdown The economy continues as the recovery in demand is less than that in supply, creating significant disinflationary pressures.
Inflation as measured by the CPI is close to zero, driven by sharp declines in components such as gasoline and travel services. The main indicators of the Bank’s inflation have fallen, although by far less than the CPI, and are now between 1.4 and 1.9%. Inflation is expected to remain low before gradually recovering to 2% as the pressure from low gas prices and other temporary effects dissipates and demand picks up, reducing the economic slowdown.
As the economy moves from reopening to recovery, it will continue to require extraordinary support from monetary policy. The Governing Council will maintain the key rate at the effective lower limit until the economic easing is absorbed so that the inflation target of 2% is reached on a sustainable basis. In addition, to strengthen this commitment and keep interest rates low over the entire yield curve, the Bank is continuing its large-scale asset purchase program at a rate of at least $ 5 billion per week d of the Government of Canada. This quantitative easing program makes borrowing more affordable for households and businesses and will continue until the recovery is well underway. To support the recovery and meet the inflation target, the Bank is ready to provide further monetary stimulus if necessary.

Note d’information

The next scheduled date for the announcement of the overnight rate target is September 9, 2020. The next full update to the Bank’s economic and inflation outlook, including risks for the projection, will be published in the MPR on October 28, 2020.


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