Bank of Canada holds key interest rate at 0.25 per cent
The Bank of Canada pledged to keep its benchmark rate at near zero until its 2 per cent inflation target is “sustainably achieved,” adding explicit forward guidance to its suite of policy measures to keep borrowing costs at historically low levels.
At a policy decision on Wednesday, the central bank kept its benchmark interest rate at 0.25 per cent, what it considers the lower bound, adding for the first time that it plans to keep it there until inflation returns to target. That would be beyond 2022, based on new forecasts the bank released separately.
“As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support,” policy makers led by Governor Tiff Macklem said in the statement. “The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 per cent inflation target is sustainably achieved.”
The move is an attempt to ramp up the central bank’s response to what it called the steepest and deepest downturn since the Great Depression.
The crisis has already taken the bank into uncharted waters, forcing it to cut the benchmark rate to near zero, injecting hundreds of billions in cash into financial markets and undertaking the first-ever foray into large-scale asset purchases.
The new explicit commitment to keep rates low for longer reduces the risk of a spike in funding costs. That should allow commercial banks to offer lower interest rates to households and businesses than they otherwise might.
For the Bank of Canada, it’s part of a transition away from emergency measures first deployed to ensure financial markets operated normally, toward policy tools aimed at keeping the economy flush with cheap money indefinitely.
The Canadian dollar was little changed after the statement, trading at $1.3565 per U.S. dollar at 10:29 a.m. Toronto time. That’s up 0.4 per cent from yesterday.
In new quarterly forecasts released on Wednesday, the central bank projects inflation to average 0.6 per cent in 2020, 1.2 per cent in 2021 and 1.7 per cent in 2022. The Bank of Canada is mandated to target inflation at around 2 per cent.
In its policy statement, the bank reiterated its commitment to continue buying at least $5 billion (US$3.7 billion) a week in Canadian government bonds until the recovery is “well underway.”
While its foray into large asset purchases is new, it’s not the first time the Bank of Canada has offered up forward guidance to keep rates low -- doing so during the 2009 recession.
“The Bank of Canada has taken a page from the 2009 playbook in providing an explicit forward guidance regarding eventual policy normalization,” said Ian Pollick, global head of non-equity market research at Canadian Imperial Bank of Commerce.
Canada’s economy will need two years to fully recover, the banks said. It acknowledged the initial rebound from Covid-19 lockdowns has been strong, but it also painted a picture of a slow return to pre-pandemic levels of activity, persistent excess capacity, muted price pressures and plenty of uncertainty. Consumers are expected to remain cautious and business investment weak.
“The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures,” policy makers said in the statement.
--With assistance from Erik Hertzberg.