MNI POLICY: BOC Keeps QE and 0.25% Rate, Sees Slack Into '23

The Bank of Canada on Wednesday left its key lending rate at a record low 0.25% and said it will continue with at least CAD4 billion a week of asset purchases, with the near-term setback from the second wave of Covid-19 keeping the economy weak into 2023.

"In view of the weakness of near-term growth and the protracted nature of the recovery, the Canadian economy will continue to require extraordinary monetary policy support," the Governing Council said in a statement. "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. In our projection, this does not happen until into 2023."

Policy makers advanced their assumption about vaccines being widely distributed to the end of this year from its prior view of mid-2022, while saying GDP will contract at a 2.5% annualized pace this quarter and limit growth for this year to 4%.

Downside risks to the 2% inflation target remain more of a concern even with the 2022 growth forecast boosted to 4.8% from 3.7%, followed by 2.5% in 2023, the BOC said. Inflation won't sustainably return to 2% and slack in the economy will linger until 2023, the conditions Governor Tiff Macklem had earlier laid out for the timing of a rate increase. While there was less slack in the economy at the end of last year, it still rivals the worst of the 2008-09 recession.

STRONGER CANADIAN DOLLAR

The stronger Canadian dollar was flagged for a third straight meeting as a drag on export growth in the central bank's economic forecast paper. On the plus side is the potential for strong consumer spending even if families save a good chunk of the strong relief checks governments have distributed, and some rebound in investment outside oil and gas, the BOC said.

"The recuperation in the Canadian economy is now more secure, and medium-term growth is forecast to be stronger," the Monetary Policy Report said. "Nevertheless, considerable economic slack remains in the economy, and a complete recovery will take some time. As a result, inflation is not anticipated to return sustainably to its 2 percent target until 2023."

Inflation is seen at 1.6% this year, up from 1% in the October projection, and unchanged at 1.7% in 2022. The 2023 estimate is 2.1%. Gasoline prices will temporarily push inflation to around 2% in the first half of this year, the BOC said.

SHRINKING BALANCE SHEET

The BOC's CAD548 billion balance sheet may shrink in coming months as CAD140 billion of t-bills and term repos come due, though that's not a clear measure of the stimulus being offered, the BOC said.

"The Bank will continue its QE program until the recovery is well underway," policy makers said in Wednesday's decision. "As the Governing Council gains confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required."

All 16 economists surveyed by MNI saw no move in rates today, and nine of 10 saw no shift in QE.