With pandemic uncertainty, the need for ongoing stimulus, and the U.S. election just around the corner, the Bank of Canada (BoC) unsurprisingly decided to keep its target overnight rate at 0.25% on Wednesday.
Monetary policy to remain supportive
Along with the decision to hold interest rates at the lower bound, the BoC outlined its plans for ongoing quantitative easing (QE). The Bank is adjusting its QE program to purchase longer-term bonds “which have more direct influence on the borrowing rates that are most important for households and businesses” and it will be gradually reducing purchases to at least $4 billion per week. This continuing focus on supporting economic growth is different from the initial purchases which were targeting the restoration of a proper-functioning capital market.
Global growth slowing after reopening jump start
As broadly expected, the jump in growth experienced as global economies began to reopen, has given way to slower growth. Pandemic uncertainties and rising infections in different regions are likely to weigh on the economic outlook and part of the reason future growth remains reliant on supportive policy. Overall, the BoC expects global GDP to shrink by about 4% this year and expand by little over 4.5% in 2021 and 2022, on average.
A similar story for Canada
The BoC was positively surprised through the summer as the economy reopened. The rebound in both GDP and employment was stronger than expected. Expectations call for a more modest pace of recovery from here through the forecast horizon. The Bank expects Canada’s economy to contract by about 5.5% in 2020, followed by about 4.0% expansion in 2021 and 2022. It did elaborate further that growth will likely be slow and uneven as the virus situation plays out, leading to a continuing output gap.
Oil prices remain low, but non-energy commodities have for the most part recovered. Due to the broad depreciation of the U.S. dollar, the Canadian dollar has mostly appreciated since the summer. Largely due to lower energy prices, inflation remains low and is likely to stay low in the near future.
Latest announcement confirms our view
At this time, we maintain our view that interest rates will remain extraordinarily low for the foreseeable future. Furthermore, we expect global policy makers to continue with supportive policies until the recovery is well established. No material strategy changes are required at this time as our portfolios remain cautiously positioned for low interest rates, policy accommodation, normalized volatility, and recovering economic growth.
If you require more information or have any questions, please do not hesitate to contact your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.