The
Bank of Canada (BoC) maintained its benchmark interest rates unchanged at 0.25
percent on Wednesday, as widely expected. The Bank also slowed the pace of its
quantitative easing (QE) program to CAD0 billion per week from CAD2 billion per
week; economists expected the pace to be slowed to CAD1 billion per week.
In
its policy statement, the Canadian central bank noted:
- Its
extraordinary forward guidance on path for overnight rate is being maintained
- It
is ending quantitative easing (QE) and moving into the reinvestment phase,
during which it will purchase Government of Canada bonds solely to replace
maturing bonds;
- It
projects global GDP to grow by 6.5 percent in 2021 - a strong pace but less
than projected in July - and by 4.25 percent in 2022 and about 3.5 percent in
2023;
- It
forecasts Canada’s economy to grow by 5 percent this year before moderating to
4.25 percent in 2022 and 3.75 percent in 2023;
- Demand
is expected to be supported by strong consumption and business investment, and rebound
in exports as U.S. economy continues to recover;
- Shortages
of manufacturing inputs, transportation bottlenecks, and difficulties in
matching jobs to workers are limiting the economy’s productive capacity; although
the impact and persistence of these supply factors are hard to quantify, output
gap is likely to be narrower than BoC had forecast in July;
- Recent
increase in CPI inflation was anticipated in July, but main forces pushing up
prices - higher energy prices and pandemic-related supply bottlenecks - now
appear to be stronger and more persistent than expected;
- Core
measures of inflation have also risen, but by less than CPI;
- BoC
now expects CPI inflation to be elevated into next year, and ease back to
around the 2 percent target by late 2022;
- BoC
is closely watching inflation expectations and labour costs to ensure that temporary
forces pushing up prices do not become embedded in ongoing inflation
- Governing
Council judges that in view of ongoing excess capacity, the economy continues
to require considerable monetary policy support;
- BoC
remains committed to holding the policy interest rate at effective lower bound
until economic slack is absorbed so that the 2 percent inflation target is
sustainably achieved. In Bank’s projection, this happens sometime in middle
quarters of 2022
- In
light of progress made in the economic recovery, Governing Council has decided
to end quantitative easing and keep its overall holdings of Government of
Canada bonds roughly constant