Bank Of Canada’s Optimism On The Rise

Canada's central bank signals ongoing loose monetary policy amidst a tough period for the economy, but with vaccines being distributed and significant fiscal stimulus working its way through, the outlook is brightening. The risks are likely skewed towards swifter policy re-adjustment, and the currency's real-rate profile is set to remain attractive.

Bank of Canada Governor Tiff Macklem takes questions from reporters on the phone as he participates in a news conference at the Bank of Canada

Canada's central bank leaves policy mix unchanged – no rate hike until 2023

The Bank of Canada maintained its target for the overnight rate 'at the effective lower bound' of 0.25% and is continuing its quantitative easing program of purchases of 4bn Canadian dollars per week.

It was only in October they announced a 'recalibrated QE' program where they shifted asset purchases towards the longer-end of the yield curve while lowering the weekly purchases from “at least C$5bn” to “at least” C$4bn.

Back then they also provided forward guidance saying the policy rate will stay at the effective lower bound (0.25%) until the 2% inflation target is 'sustainably achieved', which according to their forecasts won’t happen until 2023. All of these viewpoints and policy actions were restated in today’s announcement.

Employment and activity levels remain well below on pre-Covid-19 levels

(Click on image to enlarge)

Source: Macrobond, ING

A brightening outlook

The strains of spiking Covid-19 cases and renewed lockdowns has been seen in recent data with employment having fallen 62,600 in December.

The central bank now believes that the economy will contract in 1Q21, however, with the vaccination process now underway and the government committed to spending $100bn over the next three years to maintain the momentum of the recovery, the economic outlook is now brightening.

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