BoC Plays The Long Game

While noting signs of improvement, the Bank of Canada has emphasized that policy will remain ultra-accommodative for a number of years. This means short rates pinned to the floor and longer-dated yields staying depressed. This suggests the central bank will play second fiddle to other short-term drivers of CAD: global sentiment, oil, and US COVID-19 cases.

The Bank of Canada, with new Governor Tiff Macklem at the helm, has left monetary policy unchanged. The bank rate has been held at “the effective lower bound of 0.25%” with the purchases of “at least C$5 billion per week” of government bonds continuing.

All other liquidity programs, plus the provincial and corporate bond purchase programs, will continue with the bank pleased by the fact that they “continue to improve market functioning," noting that “with reduced market strains, their use has declined."

The press release underlines the sense of uncertainty, with the central bank presenting a central scenario based on there being no second COVID-19 wave. This concludes that the most likely outcome is a 5% contraction in the global economy over the course of 2020, before rebounding 5% in both 2021 and 2022, with the risks tilted to the downside given the potential for a resurgence in infections.

Central Bank policy rates

Macrobond, ING

A long road to recovery

Canada is looking for a decline in output of 7.8% this year, with growth of 5.1% next year, and 3.7% in 2022 (ING is forecasting -7.1%, +4.6%, and +2.8% for the respective years).

We would put down the reason for Canada’s under-performance as due to its greater dependency on commodities, particularly oil and gas, which are experiencing major structural challenges. It is also more exposed to international trade versus many other major economies, which, with rising protectionism and uneven country recoveries, poses challenges.

As such, a significant output gap will remain in existence for a number of years, which will depress medium-term price pressures. Consequently, inflation is not a constraint to Bank of Canada policy, and the press conference states that even as the recovery continues, the economy will require ongoing “extraordinary monetary policy support."

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