BoC Maintains Interest Rates in Last Meeting of 2020

The Bank of Canada (BoC) on Wednesday maintained interest rates unchanged, as well as its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week.

The rebound in the global and Canadian economies has unfolded largely as the Bank had anticipated in its October Monetary Policy Report (MPR), according to the bank’s statement earlier today.

Positive news about the development of effective Coronavirus vaccines is providing reassurance that the pandemic will end and more normal activities will resume, although the pace and breadth of the global rollout of vaccinations remain uncertain, the bank further noted.

Near term, new waves of infections are expected to set back recoveries in many parts of the world.

Accommodative policy and financial conditions are continuing to provide support across most regions. Stronger demand is pushing up prices for most commodities, including oil. A broad-based decline in the US exchange rate has contributed to a further appreciation of the Canadian dollar.

In Canada, national accounts data for the third quarter were consistent with the Bank’s expectations of a sharp economic rebound following the precipitous decline in the second quarter.

The labour market continues to recoup the jobs that were lost at the start of the pandemic, albeit at a slower pace. However, activity remains highly uneven across different sectors and groups of workers. Economic momentum heading into the fourth quarter appears to be stronger than was expected in October but, in recent weeks, record high cases of COVID-19 in many parts of Canada are forcing re-imposition of restrictions.

The bank expects this to weigh on economic growth during the first quarter (Q1) of 2021 and to contribute to a choppy trajectory until a vaccine is widely available.

Canada’s economic recovery will continue to require extraordinary monetary policy support.

The BoC will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved.

Consumer price index (CPI) or the inflation rate in Canada rose to 0.7 percent in October, largely reflecting higher prices for fresh fruits and vegetables.

While this suggests a slightly firmer track for inflation in the fourth quarter, the outlook for inflation remains in line with the October MPR projection. Measures of core inflation are all below 2 percent, and considerable economic slack is expected to continue to weigh on inflation for some time.

In our October projection, this does not happen until into 2023. To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway and will adjust it as required to help bring inflation back to target on a sustainable basis. We remain committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.

The BoC next policy meeting is scheduled for January 20, 2021.