- Overnight rate and quantitative easing (QE) unchanged
- Rates will remain low until economic slack is absorbed
- Watch for upward revisions to the BoC’s forecasts in January
As expected, the Bank of Canada made no policy changes at its final meeting of 2020. The overnight rate was held at 0.25% and purchases of Government of Canada bonds (QE) will continue at a pace of at least $4 billion per week. There are a number of recent developments that, on balance, argued for a steady hand from the BoC:
- Rising case counts and renewed restrictions: The BoC’s Q4/20 GDP growth forecast (+1% annualized) was already fairly conservative, so we don’t see substantial scope for disappointment in the current quarter. The bank acknowledged extended restrictions could mean some downside risk in Q1/21—and growth in the past quarter was already a bit short of the BoC’s expectations. Overall, the recent/near-term growth backdrop looks a bit less solid than the BoC was assuming in October, but the policy statement wasn’t overly downbeat in that regard.
- Vaccine news: The BoC assumed the pandemic would run its course by mid-2022, so the imminent rollout of effective vaccines (likely ramping up through the first half of next year) suggests upside risk to the pace of recovery in 2021 and 2022. The bank didn’t go that far in today’s statement, simply saying recent news “is providing reassurance that the pandemic will end and more normal activities will resume,” but with the caveat that the timing and pace of vaccine rollout remains uncertain. Even taking near-term challenges into account, we think a steeper growth profile beyond Q1/21 will see economic slack absorbed sooner than the BoC assumed in October. The BoC didn’t get ahead of itself, though, with forecast revisions having to wait until January.
- Fiscal policy: Government support for households and businesses has been extended well into next year, which the BoC said should help maintain incomes during the second wave and support the recovery. The BoC and other central banks have consistently argued governments are better placed to manage the economic impact of the pandemic, and ongoing fiscal support (including potential stimulus spending as the recovery progresses) reduces pressure on the BoC to do more.
Overall, we think vaccine news provides more than enough light at the end of the tunnel for the BoC to look through any modest growth disappointments stemming from the second wave. Without updated forecasts, though, it’s not surprising that the BoC was guarded in its optimism today. There’s still a long way to go in the recovery—Q3 GDP was 5.3% below pre-pandemic levels, worse than the decline seen in 2008/09. The bank reiterated that its October forecasts didn’t envision economic slack being absorbed until 2023. Updated forecasts in January should move that timeline forward into 2022.
