Unchanged Monetary Policy From the Bank of Canada

The Bank of Canada (BOC) monetary policy decision was closely watched by Canadian Dollars (CAD) traders yesterday. It was the second major central bank to release its policy statement this week after the Bank of Japan did the same a day earlier.

The expectations were that the CAD pairs would experience higher volatility than usual.

They did, despite the fact that BOC kept the interest rate unchanged, close to the zero boundary, at 0.25%.

Details of the Monetary Policy Statement Issued by the Bank of Canada

BOC’s message was simple and straightforward – the bank stands ready to provide a new monetary stimulus for an extended period of time, should the economy need it. Also, the message reiterates once again the 2% inflation-targeting model.

A good chunk of the monetary policy report focused on the impact the COVID-19 had on the economy and what the expectations of the bank are for the period ahead. The Governing Council is aware that this is not a normal recession, and its base-case scenario considers a contraction of -8% this year, followed by 5% in 2021 and 4% in 2022.

One interesting point is that BOC expects a much-better second semester this year than the one that just ended a couple of weeks ago. For example, the contraction in the first semester was about -15%. Having said that, to achieve a contraction of only -8% for the entire year, it means that the second semester must outperform the first one.

Inflation is on BOC’s mind too. It does not see it rise much above the zero level as long as prices for gasoline, travel, or closing are pulling it down. Moreover, despite BOC engaging in unconventional monetary policy (i.e., quantitative easing), inflation is still not seen as rising for the time being.

In other words, there is room for more increases in the BOC’s balance sheet, currently standing at a modest 20% of the 2019 Q4 GDP. As a comparison, the Swiss National Bank (SNB) or Bank of Japan (BOJ) balance sheets exceed 100% of their respective GDP if we consider the same metrics (i.e., 2019 Q4 GDP).

To sum up, BOC is determined to keep interest rates lower for longer, at least until the economic slack is absorbed and the 2% target achieved. Moreover, it is determined to do so across the yield curve, meaning only one thing – the balance sheet is poised to rise further.

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