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The Bank of Canada reiterated its pledge to keep interest rates at historically lows for years to come, but dialed back its willingness to take even more aggressive action and said it could adjust its bond purchase program.
In a decision Wednesday from Ottawa, policy makers led by Governor Tiff Macklem held the bank’s benchmark rate at 2% and said they’ll leave it at the effective lower bound until economic slack is absorbed so that the 2% inflation target is “sustainably achieved.”
The Bank of Canada removed language about being prepared to offer more stimulus if necessary. While it retained a pledge to buy government bonds at the current pace, the central bank said quantatitive easing will be “calibrated” to provide the needed stimulus. Analysts said that may be a signal Macklem intends to slow purchases before its lifts its conditional forward guidance on rates.
“As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support,” the bank said in the policy statement.
The Canadian dollar rose, gaining 0.6% to C$1.3163 per U.S. dollar at 10:42 a.m. in Toronto trading. Yields on Canadian government five year bonds rose 1 basis point to 0.37%.
The language is largely unchanged from July and is part of the central bank’s efforts to help pull Canada out of the deepest downturn since the Great Depression. Policy makers aren’t likely to stray from that stance even amid signs the economy has snapped back more quickly than anticipated.
The bank will continue to purchase government bonds at the current pace “until the recovery is well underway,” and will be “calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”
“The Bank was deliberately cryptic about its intentions in terms of modifying the QE program, as it doesn’t want to see yields spike higher and dull the stimulus low rates across the curve are delivering,” CIBC Chief Economist Avery Shenfeld said by email. “At some point, it will have to slow its purchases down to avoid owning too large a share of the outstanding issues.”
The central bank said the economy is evolving broadly in line with its July forecasts, even though bounce back in the third quarter looks to be faster than anticipated.
Second-quarter output plunged 13% from where it was at the end of 2019 — a historic collapse.
Gross domestic product data for June and July also suggest the recovery has been stronger than the central bank anticipated, potentially putting the economy on track to eliminate spare capacity well before the two-year time frame Macklem outlined.
But Wednesday’s statement was an attempt to temper optimism.
“Business confidence and investment remain subdued,” policy makers said. “While recent data during the reopening phase is encouraging, the Bank continues to expect the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.”
The central bank has committed to a rate freeze until excess capacity is absorbed — putting it on hold until at least 2023, based on their own forecasts.
The Bank will release a new set of economic forecasts at its next monetary policy report in October. Macklem is scheduled to give a speech and press conference on Thursday.
— With assistance by Erik Hertzberg
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