Loonie Surges After Hawkish Bank Of Canada Sees Faster Recovery, Warns Of Upside Inflation Risk

As expected, the Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank also kept its guidance and QE program unchanged at its current pace of at least $4 billion per week.

In the broadly hawkish statement, the BOC said that while policy settings were unchanged (rates, guidance, QE unchanged), the Bank upgraded its growth view for this year, and for Q4 2020, while seeing inflation as a little firmer this year than it foresaw in October. It also sees the output gap closing earlier than it did when it made forecasts in October.

Below are the highlights from the statement (via Newsquawk):

  • Rates: Unchanged at 0.25% (exp. 0.25%; there was a small risk of a so-called "micro-cut")
  • Guidance: Unchanged "The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our projection, this does not happen until into 2023" (prev. rates unchanged until economic slack is absorbed, inflation at target, likely will not happen until into 2023)
  • QE: Unchanged at CAD 4bln/week (prev. CAD 4bln/week)
  • Outlook:
    • Q4 2020 growth view: (prev. -4.3%)
    • Q1 2021 growth view:
    • End-2021 growth view: (prev. 3.8%)
    • End-2021 inflation view: (prev. 1.3%)
  • Output gap view: -2.75% to -3.75% (prev. -3% to -4%, seen closing significantly after 2022)
  • Neutral rate view: Unchanged 1.75-2.75% (prev. seen between 1.75-2.75% in Q3)

Other notable highlights from the Monetary Policy Report: the BOC cut its near-term growth estimates on regional lockdowns but raises longer-term outlook on vaccines. It now expects Q1 2021 GDP to contract 2.5% q/q, and revised its 2021 GDP growth down to +4% y/y from +4.2% y/y previous; this however was offset by an upward revision to 2022 GDP growth from 3.7% to 4.8% y/y.

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