The Bank of Canada reiterated its pledge to keep interest rates at historic lows for years to come, but dialed back its willingness to take even more aggressive action and said it could adjust its bond purchase program.

In a decision Wednesday from Ottawa, policy makers led by Governor Tiff Macklem held the bank’s benchmark rate at 0.25 per cent and said they’ll leave it unchanged until economic slack is absorbed so that the 2 per cent inflation target is “sustainably achieved.” The central bank also retained a pledge to buy government bonds at the current pace and maintain extraordinary monetary policy stimulus throughout what it calls the recuperation phase of the recovery.

The accommodative stance is largely unchanged from the last policy statement in July, part of the central bank’s efforts to help pull Canada out of the deepest downturn since the Great Depression. At the same time, the bank indicated it’s prepared to make some alterations to policy by paring quantitative easing if needed.

“The Bank was deliberately cryptic about its intentions in terms of modifying the QE program, as it doesn’t want to see yields spike higher and dull the stimulus low rates across the curve are delivering,” CIBC Chief Economist Avery Shenfeld said by email. “At some point, it will have to slow its purchases down to avoid owning too large a share of the outstanding issues.”

The central bank removed language about being prepared to offer more stimulus if necessary. It also said bond purchases will be “calibrated” to provide the needed stimulus, which analysts speculated may be a signal Macklem is setting the stage to temper his reliance on purchases if massive holdings begin to overly shrink supply.

Canada’s dollar rose 0.6 per cent to $1.3160 against the U.S. dollar at 11:50 a.m. in Toronto trading. Yields on government 10-year bonds rose 2 basis points to 0.59 per cent.

The central bank’s commitment could keep the policy rate unchanged until at least 2023, based on forecasts released in July. But Macklem had indicated he may tinker with the asset purchase program before then.

Balance Sheet

Growth in the central bank’s balance sheet has already stalled at about $540 billion (US$410 billion) since mid July, or about 27 per cent of nominal GDP, as increased holdings of government bonds are offset by declining treasury bills.

There is nothing in the statement, however, that indicates any adjustments will be imminent, and the central bank will be wary of doing anything that drives up yields. Policy makers on Wednesday said they will continue to purchase government bonds at the current pace “until the recovery is well underway.”

They also said the economy is evolving broadly in line with their July forecasts. While the bounce back in the third quarter looks to be faster than anticipated, the 13 per cent decline in output in the first half of this year was as expected. At the same time, business confidence and investment remains “subdued,” with the recovery likely to be long and uncertain.

What Bloomberg’s Economists Say

“We expect the October meeting will show the bank’s central forecast scenario is on the pessimistic side. Yet faster-than-expected recuperation is unlikely to move the policy needle, as portions of the economy will not be healthy for an extended period.”

--Andrew Husby

“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,” according to the statement.

One way to potentially ease off hard bond purchase guidance without spooking markets could be to introduce yield curve control, where the central bank targets a specific medium-term interest rate. That would allow it to purchase just enough bonds to keep rates on hold, without committing to a specific amount. Or the bank may simply acknowledge that as the economy recovers, fewer asset purchases will be needed, Shenfeld said.

Some clarity could come Thursday when Macklem is scheduled to give a speech and press conference. The next rate decision is Oct. 28.

--With assistance from Erik Hertzberg.