BoC Preview and Review
The pandemic has prompted a broad re-evaluation from policymakers both in government and central banks globally. The Fed is the highest profile in the central bank space with Chair Powell announcing a move to average inflation targeting in a recent speech. Full details of the shift will be unveiled perhaps as soon as September’s FOMC meeting. In Canada, the Bank of Canada has kicked off the review of their policy framework ahead of next year’s renewal with the government. The renewal occurs every five years, with the review of the framework taking place the year before. With the Bank of Canada delving into quantitative easing and other non-traditional policies, the policy review has the potential to be a bit broader than in the past. Here’s a quick look at where the BoC’s various non-traditional policies stand:
The above covers the major programs, though there are some other smaller actions the BoC has taken. The key takeaway from the above is that, while most of the support programs are ongoing, they have shrunk in size considerably from their peak. Falling holdings of T-bills (amid smaller auction sizes and smaller purchases) and maturing repo operations will be somewhat offset by ongoing buying of GoCs, provincial bonds and CMBs (Chart 1). Note that the BoC’s balance sheet contracted through most of August and will likely be steady to lower in the coming months unless asset buying ramps up again (Chart 2).
We’re not expecting any major changes to rates or QE at next week’s policy meeting. Indeed, the backdrop has improved since the last meeting in July. There’s only a policy statement, no Monetary Policy Report, this time around. Note that the July MPR had Q2 GDP contracting 43% annualized and Q3 rebounding 31.3%. We already have Q2 at -38.7%, more than 4 ppts better, while Q3 is tracking north of 40% growth (we’re at 45% with upside risk) (Chart 3). While the recovery still has a long way to go, it’s clear we’re in a better place than the BoC expected six weeks ago. Indeed, the statement is expected to note as much, while focusing on the risks still ahead and the fact that a full recovery is still many quarters away (Chart 4).
The key for the Bank of Canada will be to reinforce that policy will remain extremely accommodative for some time yet. The strong run in the domestic data has been impressive; and, while our upgrade of the 2020 growth forecast last week is a notable positive, GDP will likely remain 3%-to-4% below February 2020 levels at year-end. To put that in perspective, the peak-to-trough drop in GDP during the 2008/09 financial crisis was 4.7%. So even with the better backdrop, there will be plenty of ground to make up in 2021, necessitating ongoing monetary policy support.
Key Takeaway: After a dramatic six months that saw fast and furious policy moves, the first foray into QE, as well as a new governor, the near-term outlook for the BoC is much quieter. We await a full review of the Bank's policy framework in 2021; in the meantime, don't look for much from next week's policy statement.