EconoFACTS

September 09, 2020 | 10:34

BoC Policy Announcement — A Long Recuperation Road

Economist

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

The Bank of Canada held policy rates steady at 0.25%, as expected. The QE program was also left unchanged with GoC buying at a pace of at least $5 bln per week. The overall tone of the Statement was largely as expected with some positives offset by the fact that this will be a very lengthy recovery. The final sentence notes that QE will continue "until the recovery is well underway", consistent with prior statement, but they added that the program "will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation target." The latter suggests that the QE program will be the first policy tool tweaked if any changes are needed. That, along with the BoC noting once again that rates are at the "effective lower bound" should put any talk of negative rates fully to bed.

The Statement highlighted the better than expected rebound in the U.S. and Canada, but for every upbeat comment there were multiple notes of caution. Indeed, the Bank is squarely focused on the fact that despite a strong reopening phase (the Q3 rebound), the recuperation phase (think Q4 and beyond) will be "slow and choppy as the economy copes with ongoing uncertainty and structural challenges." We certainly won't argue that point, as GDP growth is tracking around 45% annualized for Q3 at the moment, while Q4 and beyond will be materially slower with COVID-related uncertainty a lingering and potentially significant downside risk.

On the CPI front, headline inflation around zero was noted, with downward pressure from energy and travel highlighted. The Bank anticipates overall CPI will "remain well below target in the near term." With respect to the core CPIs, the Statement mentions that all three measures are below 2% and reflect "the large degree of economic slack."

Key Takeaway: There were no surprises from the BoC today. The Statement noted the better-than-expected rebound, but it's crystal clear that road to a full recovery and a closing of the output gap will a very long one. The Bank remains firmly committed to providing "extraordinary monetary policy support" for some time...likely years.