Canada holds rate, will provide more stimulus if needed

      Canada’s central bank left its key interest rates steady at what it describes as the effective lower bound and will continue purchasing Canadian government bonds of at least $5 billion a week, adding the economy will continue to require extraordinary monetary policy support as its moves from “reopening to recuperation.”
     The Bank of Canada (BOC) kept its target for the overnight rate at 0.25 percent, as widely expected, after cutting it three times in March by a total of 150 basis points. The bank rate was also left at 0.50 percent and the deposit rate at 0.25 percent.
     Under the first governing council meeting chaired by Governor Tiff Macklem, who replaced retiring Stephen Poloz last month, BOC said the policy interest rate would be kept at the effective lower bound until economic slack is absorbed so the 2.0 percent inflation target is achieved.
      “To support the recovery and achieve the inflation objective, the Bank is prepared to provide further monetary stimulus as needed,” BOC said in a more specifically dovish guidance than in June when it merely said any further policy actions would be calibrated to provide the necessary degree of policy accommodation to achieve the inflation target.
      BOC said its support of financial markets since March, such as term repo operations, are having their intended effects of reducing market strains while the purchases of provincial and corporate bonds will continue and it “stands ready to adjust its programs if market conditions warrant.”
      In an update to its economic forecast that included a central scenario based on no second wave of the Covid-19 virus rather than the normal base-case projections, BOC estimated economic activity in the second quarter of this year was 15 percent below the second quarter of 2019, the steepest decline since the Great Depression but still less severe than in its worst scenarios envisaged in April.
     ”There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output,” BOC said, adding decisive fiscal and monetary policy actions have supported incomes and helped lay the foundations for a recovery.
     Some 40 percent of the economic collapse in the first half of the year is expected to be made up in the third quarter but the economy’s recuperation will then slow as the pandemic continues to affect consumer confidence and behavior, and as the structure of the economy adjusts.
     Canada’s economy is seen contracting by 7.8 percent this year, down from 2019 growth of 1.7 percent, and then expanding 5.1 percent in 2021 and 3.7 percent in 2022.
     However,  economic slack will persist and inflation is seen averaging 0.6 percent this year, down from 1.9 percent last year, and then slowly rise to 1.2 percent in 2021 and 1.7 percent in 2022.
     Canada’s inflation rate has dropped in recent months, with consumer prices down an annual 0.4 percent in May following a 0.2 percent fall in April, well below its 2.0 percent target.

     The Bank of Canada released the following statement: