MNI POLICY: BOC Slows QE, Holds 0.25% Rate, Sees Long Recovery

The Bank of Canada slowed its QE program to at least CAD4 billion a week from at least CAD5 billion on Wednesday, a move few investors anticipated, while affirming the program will remain in place until the economic recovery is well underway.

The policy rate remained at the "effective lower bound" of 0.25%, as expected by all economists surveyed by MNI, and policy makers reiterated the rate will remain there until slack is absorbed and inflation sustainably returns to their 2% target. Recent renewed Covid-19 restrictions will hurt growth in coming months while major slack in the economy will keep inflation below 2% into 2023, the BOC said.

"The Bank is recalibrating the QE program to shift purchases towards longer-term bonds, which have more direct influence on the borrowing rates that are most important for households and businesses," Governor Tiff Macklem and his deputies said in the statement. "The Governing Council judges that, with these combined adjustments, the QE program is providing at least as much monetary stimulus as before." The statement didn't specify as it did in September that QE will continue to be focused on federal government bonds.

"As the economy recuperates, it will continue to require extraordinary monetary policy support," the BOC statement said. "We are committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective."

WEAKER 2021 INFLATION

Consumer prices will rise 0.6% this year and the BOC marked down inflation next year to 1% from 1.2%, before they move to 1.7% in 2022. "Ongoing and significant slack" will keep the economy from full output until 2023, the central bank's Monetary Policy Report (MPR) said.

"The near-term slowing in the recuperation phase is likely to be more pronounced as a result of the recent increase of COVID-19," the MPR said. Growth will slow to a 1% annualized pace in the fourth quarter, from a third-quarter figure that was boosted to 47.5% from a July estimate of 31.3%.

GDP will contract 5.7% this year, less than the July reading on a stronger-than-expected burst of spending after the spring Covid lockdown, the BOC said. Growth will average just under 4% over the next two years, still not enough to close the output gap even with estimates of potential growth slashed on weaker investment and labor supply.

"The economic recovery is projected to be prolonged, underpinned by policy support but largely influenced by the evolution of the virus, ongoing uncertainty and structural changes to the economy" the BOC said. The estimated range for the neutral interest rate was also lowered 50bps to 1.75% to 2.75%.

Canada's dollar has also strengthened recently even with prices for exported crude oil well below pre-pandemic levels, because of increased global risk appetite and lower U.S. interest rates, the BOC said. Exports may not recover to pre-pandemic levels until mid-2022, the BOC said.