Bank of Canada: long term low rate

Daniel Fowler
October 29, 2020

James Laird, co-founder of Ratehub.ca, said the outlook suggests low interest rates until at least 2023, which is the earliest the bank anticipates the economy would be able to handle higher rates.

"That government investment is going to need to.be thoughtful, it's going to need to be carefully targeted, and time-limited, and it's going to need to be focused on getting Canadians back to work".

The Bank of Canada said it will reduce its Canadian government bond purchases to $4-billion a week while shifting more of its purchases to longer-term bonds, as the bank recalibrates its quantitative easing to deliver stimulus to an economy that it cautions is headed into a slowing and less certain phase of recovery.

While maintenance of its rate guidance was expected, the adjustments to the quantitative easing program came as a surprise, and the central bank went out of its way to reassure markets the overall impact on stimulus won't change.

However, "despite this ongoing uncertainty, the Bank is returning to its usual practice of providing a projection for economic growth and inflation".

My takeaway from the BOC is the high level of caution, along with a warning that United States growth is "slowing considerably".

In all, it represents a continuation of unprecedented measures that have helped Canada emerge more quickly than expected from the worst of the economic crisis, with Macklem showing little inclination to pare back efforts.

The hardest-hit sectors, such as restaurants, travel and accommodations, continue to lag as the economy recuperates. The recovery in Europe is slowing amid mounting lockdowns.

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After a strong rebound over the summer, Canada's #economy continues to recover but has a long and choppy road ahead.

But the central bank projects fourth-quarter growth will be "just barely positive" - weaker than previously expected - due to the resurgence in COVID-19 cases.

Workers in those sectors, as well and youth and low-wage workers, continue to face high levels of unemployment, the report says. Recognizing these challenges, governments have extended and modified business and income support programs.

Officials estimate the economy will shrink by 5.7 per cent this year, but grow by 4.2 per cent next year, and 3.7 per cent in 2022.

Meanwhile, the most recent Consumer Price Index data from Statistics Canada showed inflation at 0.5 per cent in September, well below the bank's target range. Measures of core inflation are all below 2 percent, consistent with an economy where demand has fallen by more than supply. It reiterated its commitment to keeping the overnight rate at near zero until the slack is absorbed and inflation is sustainably at target.

The policy rate remains on hold at 0.25%, which the central bank considers its lower bound. It said that based on its latest economic projections, "this does not happen until into 2023".

The Bank of Canada toned down the pace of QE if only because it can't sustain the current place indefinitely. It also recommitted to purchasing bonds until the recovery is "well underway".

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