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Bank of Canada: Policy and support to continue as is

With the Canadian economy recovering, the Bank of Canada (BoC) announced on Wednesday that it would hold its target overnight rate at the lower bound of 0.25%. The Bank reiterated that “extraordinary monetary policy support” will be required to support the economy as it continues to recuperate. To reinforce its commitment to keep interest rates low, the BoC will also continue its quantitative easing program, purchasing Government of Canada bonds to the tune of at least $5 billion per week.

Goals remain the same: Growth, employment, and inflation

With stronger than expected consumption, household spending rebounded significantly. Employment also rebounded, albeit unevenly. On improving foreign demand, exports have also increased. However, business investment remains subdued. “… the Bank continues to expect the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.”

With lower energy and travel service prices, Consumer Price Index inflation is near 0%. The BoC will hold on rates until the “economic slack is absorbed so that the 2% inflation target is sustainably achieved.” Additionally, the quantitative easing program “will continue until the recovery is well underway and will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”

Results were broadly expected… but there are encouraging signs

The BoC noted that the robust, near-term economic recovery is aligned with its expectations and that continuing support from fiscal and monetary policy will be needed to combat the uncertainty from COVID-19 and its impact on the global economy. The recovery remains dependent on the spread of the virus and the measures needed to contain it.

With that said, economic activity has improved in the Canadian economy (and the broader global economy) as restrictions eased. Results from the U.S. have been stronger than expected, while emerging markets have been mixed. Oil prices remain low but prices for other commodities have stabilized. Overall, global financial conditions are still accommodative.

Canadian GDP fell by 11.5% in the second quarter and 13% over the first half of 2020. However, the third quarter looks encouraging, with economic activity bouncing back quicker than anticipated. 

“Economic activity has been supported by government programs to replace incomes and subsidize wages. Core funding markets are functioning well, and this has led to a decline in the use of the Bank’s short-term liquidity programs. Monetary policy is working to support household spending and business investment by making borrowing more affordable.”

Announcement was broadly expected and accounted for in our strategy

Following the announcement, the Canadian dollar declined by a small amount versus the U.S. dollar and Government of Canada bond yields were modestly higher.

Aligned with the previous announcement in July, this decision helps to confirm our view that the target overnight rate will remain extraordinarily low for the foreseeable future as policy makers continue to support the global economy. There is, however, little incentive for the Bank of Canada to provide further accommodation as the coordinated effort of the world’s central banks has reduced rates to very low levels across the yield curve. As our portfolios are positioned for an environment of continued policy accommodation and recovering economic growth, no material changes are required at this time.

For more information, 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.

About the Author

Wesley Blight, CFA, CIM, FCSI, is an Assistant Vice President with the Multi-Asset Management team at MD Financial Management. He is responsible for the investment results of the firm’s fixed income and multi-asset products.

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