MNI POLICY: BOC to Hold Rate Until CPI Hits Goal, May Boost QE

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada said Wednesday it will hold interest

rates near zero until its inflation goal is met and extended a pledge to buy at

least CAD5 billion of federal government bonds each week to tackle a prolonged

recovery facing downside risks from Covid-19. 

     "To support the recovery and achieve the inflation objective, the Bank is

prepared to provide further monetary stimulus as needed," according to its

decision from Ottawa. "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."

     While the benchmark lending rate was unanimously expected to remain at

0.25% in an MNI survey, there were scant hopes for any kind of forward guidance

at this meeting. The BOC affirmed it sees 0.25% as the lower bound on rates,

meaning QE is likely the main tool if more stimulus is needed.

     Tiff Macklem in his first full meeting as governor used phrases his

predecessor avoided about the economic weakness, calling it the most severe

downturn since the Great Depression and vowing to battle it using QE. The BOC

also restored part of the economic forecasts Stephen Poloz dropped, laying out a

scenario where the economy and inflation won't meet the BOC's goals over the

two-year planning horizon. 

     --RISKS TILTED DOWN

     The output gap, a BOC key measure of the economy's potential, was 6% to 7%

in the second quarter, while it was almost closed before the pandemic. 

     Global GDP falls about 5% this year and "the risks appear to be tilted to

the downside, largely because of the potential for a second wave of the virus,"

the BOC said. "In Canada, a much weaker scenario could crystalize the risks

associated with high household indebtedness."

     Canada's GDP fell 13% in Q2 and will regain 7% in Q3, making up about 40%

of the decline. Growth will likely slow after that, and by 2022 potential output

will still be 4% lower than what the BOC projected before the pandemic. 

     "After the initial bounce back in GDP growth, the economy is expected to

enter a more protracted and gradual recovery," the BOC's Monetary Policy Report

said. "This reflects persistent effects of ongoing physical distancing measures,

a slow rebound in foreign demand and subdued confidence on the part of

households and firms." 

     Inflation will be 0.6% this year, 1.2% in 2021 and 1.7% in 2022. The BOC

saw little immediate risk of deflation, with CPI down 0.1% in Q2 before gaining

0.4% in Q3. Even with a major shift in spending patterns through the pandemic, a

re-weighted inflation index showed only a slightly less pronounced drop in

prices, the BOC said, adding it will continue to track the adjusted index

through the recovery.

     The baseline projection assumes no second wave of Covid in Canada or

globally and the pandemic to run its course by mid-2022. It's still unclear how

much "scarring" the economy faces or how demand will recover after supply comes

back online.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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