The Bank of Canada today kept its target for the overnight rate at the effective lower limit of ¼ per cent, with the bank rate at ½ per cent and the deposit rate at ¼ per cent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing program (QE). The Bank is recalibrating the quantitative easing program to shift purchases to longer-term bonds, which have a more direct influence on borrowing rates that are most important to households and businesses. At the same time, the total purchases will gradually be reduced to at least $ 4 billion per week. The Governing Council considers that with these combined adjustments, the QE program provides at least as much monetary stimulus as before.
Global and Canadian economic prospects developed largely as expected in July Monetary Policy Report (MPR), with rapid expansions as economies reopen to make room for slower growth, despite considerable excess capacity remaining. Going forward, the increase in COVID-19 infections is likely to weigh on the economic outlook in many countries, and growth will continue to depend heavily on political support.
In the United States, GDP growth has rebounded strongly but appears to be slowing considerably. China’s economic output has returned to pre-pandemic levels and its recovery continues to expand. Emerging market economies have been hit hardest, especially those with severe epidemics. The recovery in Europe is slowing against a background of growing bottlenecks. Overall, global GDP is expected to contract by around 4% in 2020 before growing just over 4 ½%, on average, in 2021-2022.
Oil prices remain about 30% below pre-pandemic levels. Meanwhile, non-energy commodity prices, on average, have more than fully recovered. Despite continued weakness in oil prices, the Canadian dollar has appreciated since July, largely reflecting a widespread depreciation of the US dollar.
In Canada, the rebound in employment and GDP was stronger than expected as the economy reopened over the summer. The economy is now in transition to a more moderate recovery phase. In the fourth quarter, growth is expected to slow significantly, in part due to the increase in the number of COVID-19 cases. The economic effects of the pandemic are very uneven across sectors and particularly affect low-income workers. Recognizing these challenges, governments have expanded and modified business and income support programs.
After declining by about 5 ½ percent in 2020, the Bank expects the Canadian economy to grow by almost 4 percent on average in 2021 and 2022. Growth is likely to be choppy as domestic demand is influenced by the evolution of the virus and its impact on consumers. and business confidence. In view of the probable long-term effects of the pandemic, the Bank has revised its estimate of Canada’s potential growth downwards over the projection horizon.
CPI inflation was 0.5% in September and is expected to remain below the Bank’s 1-3% target range until early 2021, largely due to weak prices for the Bank. energy. Core inflation measures are all below 2%, which corresponds to an economy where demand has fallen more than supply. Inflation is expected to remain below target throughout the projection horizon.
As the economy recovers, it will continue to need extraordinary monetary policy support. The Governing Council will keep the policy rate at its effective lower limit until the economic downturn is absorbed, so that the inflation target of 2% is sustained over time. In our current projection, this will not happen until 2023. The Bank is continuing its quantitative easing program and recalibrating it as described above. The program will continue until the recovery is well underway. We commit to providing the necessary monetary stimulus to support the recovery and meet the inflation target.
The next scheduled date for the announcement of the target for the overnight rate is December 9, 2020. The next full update of the Bank’s economic and inflation outlook, including risks to the projection, will be posted in the RPM on January 20, 2021.