Quick Take

No trick or treat as Bank of Canada holds rates and offers glum outlook

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The Conference Board of Canada Principal Economist Eldar Sehic offers the following insights on today's Bank of Canada interest rate announcement:

In light of a dim outlook, the Bank of Canada unsurprisingly kept its policy interest rate on hold today, while adjusting its quantitative easing program. The central bank reiterated that the economy is not close to recovering, and that core inflation remains below its 2 per cent target. Today’s release reinforces our view that the Bank of Canada will keep its policy interest rate at rock-bottom until early 2023.

  • Today the Bank of Canada maintained its target for the overnight interest rate at 0.25 per cent, recognizing that the Canadian economy is still reeling from the pandemic.
  • The Bank also decided to recalibrate its quantitative easing program, shifting purchases to longer-term bonds and reducing the weekly amount purchased from a minimum of $5 billion per week to a minimum of $4 billion per week.
  • Total Consumer Price Index (CPI) inflation was 0.5 per cent year-over-year in September, while core inflation averaged 1.7 per cent.
  • Until a 2 per cent inflation target is achieved, the central bank plans to keep the policy interest rate at the effective lower bound of 0.25 per cent.
  • In its updated Monetary Policy Report (MPR), the Bank stated that the phases of recovery are evolving largely as expected in its July report, but noted that the initial rebound was better than projected, while the near term is weakened by the recent rise in COVID-19 cases.
  • The central bank revised up its 2020 real gross domestic product (GDP) growth projection for Canada from -7.8 per cent to -5.7 per cent, but softened its 2021 projection from 5.1 per cent to 4.2 per cent, given the lasting global effects of the pandemic.
  • The central bank also lowered its estimate of Canada’s potential output growth, reflecting declines in labour market participation, productivity, and investment. As a result, the level of potential output by the end of 2022 is currently estimated to be about three per cent lower than the Bank’s April 2019 assessment.
  • Along with adjusting potential output, the Bank now sees the nominal neutral rate in Canada somewhere in the range of 1.75 per cent to 2.75 per cent, 50 basis points below the April 2019 estimate.
  • Following today’s release, we continue to expect Canada’s real GDP to recover in late 2021 and for the policy interest rate to rise in early 2023 once the economy is running on all cylinders.

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Eldar Sehic

Eldar Sehic

Principal Economist

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