Canada’s central bank’s rate announcement was brief, but had a lot of details for investors to unpack. Bank of Canada (BoC) announced they would be making no changes to rates at this time, as widely expected. Two details did stand out though – housing, and quantitative ease (QE). The central bank is surprised by housing strength, and separately said they would attempt to control yields with QE. While the two points were made separately, the public may perceive the latter as adding fuel to the former.
Not Today – No Changes To Policy Announced
The BoC announced they won’t be making any policy changes today, as widely expected by analysts. The overnight rate remains at the effective lower bound of 0.25%, as does the deposit rate. The bank rate is also still 0.50%. The only indicator that had a slight chance of moving was QE, and it was slim. The central bank announced they would continue with the program at $4 billion per week.
Housing and Economy Doing Better Than Expected
The BoC’s comments on housing were highly anticipated, but notably brief. They only mentioned housing once, saying “housing market activity has been much stronger than expected.”
The economy also surprised the central bank. They said, “the economy is proving to be more resilient than anticipated to the second wave of the virus and the associated containment measures.”
Even with the better than expected environment, they see “considerable economic slack.” The term means underutilized resources. In this situation, they were largely referencing elevated unemployment levels. He reiterated policy would remain loose until this slack has been absorbed.
The slack will be considered absorbed when employment has improved, and “the 2 percent inflation target is sustainably achieved.” Inflation has an acceptable operating band of 1 to 3 percent, and the BoC is observing it at the bottom of this band. They see it rising “temporarily” to the top of the band over the next few months.
Extra emphasis on temporarily. The central bank has already said a boost to inflation will be due to base effect. It expects inflation to settle at a lower lever after the comparison period smoothes, before hitting the ideal target. The BoC doesn’t see that occurring until at least 2022.
QE Will Be Used To Try And Keep Rates Low
Circling back to those QE purchases, the governor stated they would maintain the level “to reinforce this commitment and keep interest rates low across the yield curve.” Adding, “the Bank will continue its QE program until the recovery is well underway.”
The BoC’s message today may already be stale in the fast moving economy. The forecast with 2022 as the year of recovery is from January. RBC had stated they see revisions to this forecast, as the economy outperforms.
No changes were expected today, but the RBC economist said they’re watching bonds in April. If they see a reduction in QE then, it would be considered a sign of tightening “overly loose” monetary policy. That confirmation of the economy outperforming may lead to a hike in rates sooner than 2022.
Like this post? Like us on Facebook for the next one in your feed.