The Bank of Canada maintained its key interest rate at historic lows and left its current pace in bond purchases in a placeholder decision that should keep expectations intact for another reduction in the emergency stimulus next month.
In a statement Thursday from Ottawa, policy makers led by Governor Tiff Macklem said they had maintained their overnight policy rate at 0.25% and that they are not raising it until damage from the Covid 19 pandemic is fully repaired. The bank also said it would continue to buy $3 billion a week of Canadian government bonds, while reiterating that the pace of asset purchases will decline as the recovery proceeds.
The tone of Wednesday's decision was largely predicted by analysts, who predicted a gradual tapering of bond purchases. The Central Bank was among the first in April from advanced economies to move to a less expansionary policy when it reduced the timetable for a possible interest rate increase and accelerated its bond purchases. Another taper is expected at the decision of the Bank of Canada on 14 July.
The central bank is continuing asset purchases to '' keep interest rates low across the yield curve, policy makers said in the statement. Decisions on the pace of net bond purchases will be guided by Governing Council's ongoing assessment of the strength and durability of recovery.
There is nothing in the statement that suggest a central bank is pushing back against further gains in the Canadian dollar even as it is acknowledged that the currency has gained along with commodity prices. The dollar is gaining 5.5% against the loonies this year.
The benchmark five-year government bond on bonds held steady at 0.86% after the decision. The Canadian dollar touched a session high of 1.2059 per dollar before paring gains.
In April, the Bank of Canada scaled back its governments debt purchases by a quarter to C $3 billion. Analysts expect that it would fall to about C $2 billion each week in July before eventually falling to a weekly rate of around C $1 billion by early next year. That would bring the central bank to a neutral pace of purchases, where holdings remain unchanged as stocks mature.
The Wednesday decision on new policy was a statement-only affair with no new forecasts. That's one reason why economists believe there would be no policy change until the next meeting, when a fresh set of projections will be released. Waiting until July also gives the bank time to reassess incoming economic data, as the nation emerges from a fresh wave of Lockdowns.
Deputies from the state legislature and Deputy Governor Tim Lane will give a speech on Thursday that provides some more insight into the policy debates.
The Bank of Canada has said it would increase the net purchases of bonds to zero before it begins to consider raising its policy rate with swaps trading suggesting investors are pricing in an 80% chance of a hike over the next 12 months. Three rate hikes over the next two years are fully priced in, which would leave Canada with one of the highest policy rates among Developed economies.
In the U.S., investors aren't calling in any rate hike by the Federal Reserve over the next year and only one over the next two years.
Risques remain. After the winter Covid 19 decision, Canada has been hit harder by winter restriction than the Bank of Canada had expected. The economy went into reverse in April and May, losing 275,000 jobs - bringing Canada closer to employment levels that Macklem considers a full recovery.
In the first quarter, annualized growth of the gross domestic product remained below the projections. But the Bank of Canada appeared to downplay the miss, calling expansion robust and characterising the underlying details as indicating '' strengthening confidence and resilient demand.
Officials also said they expect the economy to recover quickly in the coming months after a slowdown in the second quarter, stemming from a spate of lockdowns over winter. They cited strong growth in foreign demand and commodity price as a tailwind to the economy.
While we tend to focus on nominal GDP, Canada is seeing a big rebound in real activity, with the commodity prices in mind, said Derek Burleton of BNN BloombergBloomberg Television's deputy chief economist at TD Bank in Toronto. That leaves the bank a bit more optimistic, and I think that is justified.
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