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BOC to Hold Rates at 0.25% for a Long Time

Posted Wednesday, July 15, 2020 by
Skerdian Meta • 2 min read

BOC remains very hawkish

While all major central banks were cutting interest rates last year, the Bank of Canada was keeping them steady at 1.75%, despite a softening of the global economy. But the coronavirus came and the BOC started slashing interest rates, like everyone else.

They cut interest rates to 1.25% initially at the beginning of March, then to 0.75% at the middle of that month and finally to 0.25% by the end of it, where they plan to keep them for a very long time, as they said earlier today. The BOC made some interesting comments, suggesting that they will keep rates at the lower band until the economy fully recovers, which will take quite long I think.

Highlights of the Bank of Canada rate decision

Bank of Canada holds rates at 0.25%, as expected
Prior was 0.25% (this is the effective lower bound for Canada
BOC pledges to keep rates at 0.25% until inflation target hit
BOC to continue $5B per week in QE; repeats buying will continue “until the recovery is well underway”
BOC stands ready to adjust its programs if market conditions warrant
Says economic decline “considerably less severe than the worst scenarios presented in the April MPR”
BOC sees 40% of activity recovered in Q3 but then “the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges”
Central scenario in in MPR shows economy not likely to return to pre-COVID levels until 2022
Sees 2020 GDP down 7.8%, up 5.1% in 2021 and up 3.7% in 2022
Says Q2 activity estimated to have fallen about 15% below its level at the end of 2019, economy appears to have bottomed in April
Sees US GDP down 8.1% in 2020, up 3.4% in 2021 and up 4.3% in 2022
Global GDP forecast down 5.2% in 2020 and up 5.2% in 2021
The path for CPI in the next year largely reflects the influence of energy prices

The big news here is this line:

“The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”

That’s forward guidance indicating no hikes until 2% inflation is ‘substantially achieved’. That last phrase leaves them some wiggle room but this is conditional forward guidance.

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