The Bank of Canada today kept the target for its overnight rate at the effective lower bound of 0.25% and scaled back some of its market operations. The repo operations are reduced from semi-weekly to once a week, and the programme to purchase bankers’ acceptances is reduced from a weekly to bi-weekly basis.
The bank stated that the economic turmoil caused by Covid-19 “appears to have peaked, although uncertainty about how the recovery will unfold remains high.” Canada experienced major losses in the labour market and in industrial output as a result of the pandemic, but the Canadian economy managed to dodge the bullet of the most severe scenario presented in the BoC’s monetary policy report of April.
The central bank sees real GDP declining further by 10-20% in Q2 this year, after falling 2.1% YoY in Q1, as output will continue to take a heavy hit from lower investment in the energy sector and continued shutdowns. The Bank expects the economy to resume growth in Q3.
The latest Monetary Policy Report from April outlines a scenario where containment measures are eased in the near future and policy measures “successfully limit any potential structural damage to the economy, in both Canada and the major trading partners”. The report states that “in such a scenario, foreign demand would come back relatively quickly, and global supply chains would be up and running in short order. Consumer and business confidence would also recover, providing an additional boost to growth”.
Exiting BoC Governor, Stephen Poloz, stated recently that he views that scenario as the most likely. Today’s rate decision announcement was not followed by a press conference or monetary policy report, so any full update on the Bank’s outlook for the economy and inflation, including risks to the projection, will have to wait until the next scheduled meeting of July 15. New BoC Governor Tiff Macklem participated as an observer in today’s meeting, but “endorses the rate decision and measures announced”. The July meeting and following press conference will be led by Macklem.
The somewhat hawkish move of scaling back market operations while rejecting negative rates had the loonie briefly rallying within today’s range against the US dollar after having weakened during the buildup to the meeting today, but the pair remains at the mercy of further developments in OPEC+ talks the coming days.
Loonie rallies against the dollar after BoC decision of keeping rates unchanged and scaling back market operations
Author: Ima Sammani, Junior FX Market Analyst