Central Banks


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Bank of Canada maintains commitment to current level of policy rate, continues program of quantitative easing

The Bank of Canada today maintained its
target for the overnight rate at the effective lower bound of ¼ percent.
The Bank Rate is correspondingly ½ percent and the deposit rate is
¼ percent. The Bank is also continuing its quantitative easing (QE)
program, with large-scale asset purchases of at least $5 billion per
week of Government of Canada bonds.

Both the global and Canadian economies are evolving broadly in line with the scenario in the July Monetary Policy Report
(MPR), with activity bouncing back as countries lift containment
measures. The Bank continues to expect this strong reopening phase to be
followed by a protracted and uneven recuperation phase, which will be
heavily reliant on policy support. The pace of the recovery remains
highly dependent on the path of the COVID-19 pandemic and the evolution
of social distancing measures required to contain its spread.

The
rebound in the United States has been stronger than expected, while
economic performance among emerging markets has been more mixed. Global
financial conditions have remained accommodative. Although prices for
some commodities have firmed, oil prices remain weak.

In Canada,
real GDP fell by 11.5 percent (39 percent annualized) in the second
quarter, resulting in a decline of just over 13 percent in the first
half of the year, largely in line with the Bank’s July MPR central
scenario. All components of aggregate demand weakened, as expected.

As
the economy reopens, the bounce-back in activity in the third quarter
looks to be faster than anticipated in July. Economic activity has been
supported by government programs to replace incomes and subsidize wages.
Core funding markets are functioning well, and this has led to a
decline in the use of the Bank’s short-term liquidity programs. Monetary
policy is working to support household spending and business investment
by making borrowing more affordable.

Household spending rebounded
sharply over the summer, with stronger-than-expected goods consumption
and housing activity largely reflecting pent-up demand. There has also
been a large but uneven rebound in employment. Exports are recovering in
response to strengthening foreign demand, but are still well below
pre-pandemic levels. Business confidence and investment remain subdued.
While recent data during the reopening phase is encouraging, the Bank
continues to expect the recuperation phase to be slow and choppy as the
economy copes with ongoing uncertainty and structural challenges.

CPI
inflation is close to zero, with downward pressure from energy prices
and travel services, and is expected to remain well below target in the
near term. Measures of core inflation are between 1.3 percent and
1.9 percent, reflecting the large degree of economic slack, with the
core measure most influenced by services prices showing the weakest
growth.

As the economy moves from reopening to recuperation, it
will continue to require extraordinary monetary policy support. 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. To reinforce this commitment
and keep interest rates low across the yield curve, the Bank is
continuing its large-scale asset purchase program at the current pace.
This QE program will continue until the recovery is well underway and
will be calibrated to provide the monetary policy stimulus needed to
support the recovery and achieve the inflation objective.

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