Ottawa, June 3, 2020—The Conference Board of Canada’s Senior Economist Robyn Gibbard offers the following insights on today's Bank of Canada announcement:
“Today the Bank of Canada unsurprisingly held the interest rate steady at its lower bound. The health of the financial system allowed it to begin rolling back some of its extraordinary market operations aimed at financial institutions. However, its purchases of provincial, federal, and corporate bonds remain in place.”
- The Bank of Canada held its overnight rate steady at 0.25 per cent today. With the interest rate already at its lower bound, and with Canada continuing to deal with a devastating economic crisis, today's move was expected.
- The Bank notes that market functioning has improved noticeably since the worst days in March. It is therefore reducing some of its market activities aimed at the financial sector. Other extraordinary market operations by the Bank - most notably those aimed at shoring up the markets for federal, provincial, and corporate borrowing - remain unchanged.
- In its release today, the Bank said it is expecting real GDP to decline by a further 10-20 per cent in the second quarter, followed by a return to growth in the third quarter. They note that the forecast is highly uncertain, however.
- Headline inflation has declined to almost zero, though this is largely due to falling energy prices. Core inflation has also declined, but remain between 1.6 and 2.0 per cent, only slightly below the Bank's target.
- Since our last Bank of Canada quick take in April, the Bank also released its Financial System Review. This review evaluated the health of Canada's financial system in the face of the current crisis. It concluded that, despite widespread stresses, Canada's financial institutions are stable and have sufficient buffers to cope with losses in the worst-case economic scenario. The Bank's extensive stress testing of Canadian financial institutions, often criticized in recent years for making banks overly cautious, appears to have done its job of preparing the financial sector for a crisis.
- At the time of writing, the Loonie stood at 0.74 US cents. It appreciated by several cents in May and is now only about a cent below its level before COVID-19.
- The next rate decision is scheduled for July 15, 2020. With rates at their effective lower bound, we do not expect any change in rates for the foreseeable future. However, given the unprecedented economic crisis, it is possible that we will hear other policy announcements from the Bank before then.
- In non-policy news, Tiff Macklem takes over as the Bank of Canada's new governor beginning today. He participated in the interest rate deliberations as an observer only, so today's decision does not offer any clues about whether his approach will differ from that of outgoing governor Stephen Poloz. However, we do not expect a major change in the Bank's approach to the current crisis.