- As expected, the Bank of Canada kept the overnight rate unchanged at ¼ percent this morning. In addition, the quantitative easing (QE) program will continue at its current pace of at least $4 billion per week.
- The Bank committed to holding the overnight rate at its current level until economic slack is absorbed and the 2 percent inflation target is sustainably achieved, which it does not expect to occur until 2023. The quantitative easing program will continue until the recovery is well underway.
- In terms of developments since the October Monetary Policy Report (MPR), the statement noted that the rebound in the Canadian economy was consistent with expectations. The labour market is continuing to recover, albeit unevenly and at a slower pace than initially. Economic momentum heading into the fourth quarter was stronger than anticipated, but the resurgence in the virus and new restrictions are weighing on growth, with the impact likely showing up in the first quarter of 2021. The Bank noted that the federal government’s recently announced measures will support business and household incomes through the second wave of the pandemic and support the recovery.
- The Bank welcomed news on the development of effective vaccines, but said the pace and breadth of the global rollout remains uncertain.
Key Implications
- Nothing too surprising today. The Bank maintained its accommodative policy stance in the face of dueling crosscurrents to its outlook. Surging caseloads and tighter restrictions will complicate Canada’s economic recovery in the near-term, with the peak impact likely bearing out early next year.
- Beyond that, hopes are pinned to a well-coordinated roll out of the vaccine. If all goes well, we could very well see a rapid economic recovery take shape as confidence returns to Canadian businesses and households, allowing them to increase spending that has been severely curtailed by the pandemic.
- The Bank of Canada will be closely watching vaccine developments. As uncertainty recedes, the Bank could make changes to their outlook in the upcoming MPR. Time will tell.
