- The Bank of Canada (BoC) kept the overnight rate at 0.25%, while also maintaining the pace of the quantitative easing (QE) program of at least $3 billion asset purchase per week.
- In today’s statement, the Bank noted that while GDP growth in the first quarter was weaker than what was expected in the April Monetary Policy Report (MPR), the underlying details reflected increasing confidence and resilient demand. An in terms of the impact of third wave, the Bank said it had evolved largely as anticipated, with high-touch sectors most affected.
- The Bank of Canada expects growth to rebound strongly in the coming months given the acceleration in the vaccine rollout and easing public health restrictions. The Bank sees inflation remaining near 3 percent through the summer due to temporary factors, but then ease as excess capacity exerts downward pressure.
- As in the April MPR, the Bank reaffirmed that it will hold the policy interest rate at the effective lower bound until economic slack is absorbed and the 2 percent inflation target is sustainably achieved, which is expected sometime in the second half of 2022. On QE, the Bank said decisions on future adjustments to the program will be guided by assessments of the strength and durability of the economic recovery.
Key Implications
- As expected, the Bank of Canada opted to keep the monetary policy stance unchanged today. The Bank previously tapered the QE program in April, and with only one additional month of data since then, there was less appetite to make another adjustment to monetary policy.
- However, the Bank left room for changes in upcoming meetings. As noted in today’s statement, the vaccination rollout is progressing extremely well in Canada, and provinces are reopening their economies. A strong rebound in domestic demand could leave the Bank with little choice but to further taper the QE program in upcoming meetings.
- A key factor that the Bank’s governing council will consider in their deliberations is the labour market recovery. The topic has surfaced repeatedly in the Bank’s communication and did so again today. If employment, especially in the hardest hit sectors, bounces back quickly this summer, it could bring forward the Bank’s monetary policy normalization schedule. But there are downside risks, particularly from variants of the virus. At the same time, as hinted at stateside, employment growth could be constrained by the difficult process of reallocating people across jobs and industries. The Bank’s Governing Council will probably need to see data through the summer months before communicating changes to its forward guidance.
