Free Trial

MNI STATE OF PLAY: BOC Sees 2nd Half Rebound; Holds Rate, QE

Bank of Canada headquarters in Ottawa


Canada's central bank on Wednesday kept the door open to further QE tapering, affirming a second-half rebound remains intact even after a surprise contraction in the second quarter, while holding a 0.25% key lending rate and QE at CAD2 billion a week.

"The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery," Governing Council members led by Tiff Macklem wrote in a statement.

Policy makers affirmed guidance for a rate hike in the second half of next year, based on its view of the economy returning to full output and inflation holding sustainably around its 2% target at that time. The key phrase on adjusting QE also remained intact: "Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council's ongoing assessment of the strength and durability of the recovery."

Governor Macklem faces competing pressures from inflation that has exceeded the top of his 1% to 3% target band for four months, and from a recent report that GDP shrank at a 1.1% annualized pace in the second quarter. The BOC tapered QE three times as the economy showed resilience amid Covid lockdowns, but the output contraction is a big reminder of the bumpy economic recovery he's warned about.

"Factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely," the BOC said.


Economists expected the lending rate and QE to remain unchanged. Many also expect a taper of asset purchases at the next meeting in October to CAD1 billion, a pace that could match maturing assets and hold the size of the balance sheet steady.

The BOC in July predicted annualized third-quarter growth of 7.3% and and sharply raised its 2020 inflation forecast to 3% from 2.3%. While a flash estimate showed July GDP fell 0.4%, the BOC didn't provide a new Q3 estimate Wednesday. The statement also pointed to one-off weakness in second-quarter auto production because of supply bottlenecks, and a slowing of hot housing markets, as anticipated by MNI reporting.

The job market still has "considerable slack," the BOC said.

Overall optimism for the second half is based on consumers still flush with cash. Massive government stimulus checks will flow through at least October, payments so large a national savings rate that was negligible before the pandemic is now in double digits.

Tapering bond purchases later this year amid a return to economic growth also helps QE from becoming a self-defeating policy that frays market trading, with the BOC's holdings still approaching 50% of the stock.

Macklem gives more details in a speech at noon Thursday on "QE and the reinvestment phase." There are no media questions as part of a tradition of scaling back during an election, set for Sept. 20.

MNI Ottawa Bureau | +1 613-314-9647 |
MNI Ottawa Bureau | +1 613-314-9647 |

To read the full story



MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.